The Mortgage Interest Deduction

[Balt]

First, full disclosure: I am a single apartment dweller. That's probably why I rant about itemized tax deductions. That being said, I recently discovered (before even seeing this blog) that owning a home would not be as beneficial from a tax standpoint as I once thought. That's because I would be buying a modest home if I decided to jump in the market (which I have considered numerous times). In fact, home ownership would probably not be beneficial at all in terms of taxes.

http://jaredbernsteinblog.com/heres-what-an-inefficient-tax-break-looks-like/

Now, obviously, some are going to say that "Well of course people with higher mortgages get more benefit." That's true, they get more benefit. They may be the only ones who actually benefit. Is that the way it should be? Should we subsidize (through tax breaks) home ownership for the people who spend $500,000 on a home, but not those who spend $200,000?

IMO, either provide greater benefit through tax breaks to the lesser among us and curtail those for the greater or just scrap the tax breaks entirely. I don't see the point of subsidizing those with greater means so heavily.

Of course the regular rules should still apply. People shouldn't be provided with mortgages they can't possibly afford. I'm not advocating another housing bubble. Let's please leave that aside in this thread.

 

[highland145]

But if you buy no home you get the standard deduction for doing nothing to boost the housing market/economy/local tax base and, depending on your income, yet can get free $$ for your kids because you had sex. Not fair, I say, cut out all deductions/credits. Let 'em eat cake.



Full disclosure: I don't have a mortgage.

 

[DCal430]

First, full disclosure: I am a single apartment dweller. That's probably why I rant about itemized tax deductions. That being said, I recently discovered (before even seeing this blog) that owning a home would not be as beneficial from a tax standpoint as I once thought. That's because I would be buying a modest home if I decided to jump in the market (which I have considered numerous times). In fact, home ownership would probably not be beneficial at all in terms of taxes.

http://jaredbernsteinblog.com/heres-what-an-inefficient-tax-break-looks-like/

Now, obviously, some are going to say that "Well of course people with higher mortgages get more benefit." That's true, they get more benefit. They may be the only ones who actually benefit. Is that the way it should be? Should we subsidize (through tax breaks) home ownership for the people who spend $500,000 on a home, but not those who spend $200,000?

IMO, either provide greater benefit through tax breaks to the lesser among us and curtail those for the greater or just scrap the tax breaks entirely. I don't see the point of subsidizing those with greater means so heavily.

Of course the regular rules should still apply. People shouldn't be provided with mortgages they can't possibly afford. I'm not advocating another housing bubble. Let's please leave that aside in this thread.

Mortgage Interest Deduction mostly benefit people making between 50,000 to 250,000 a year, after that the limit on the MI deduction make it less beneficial, and before that you are unlikely to afford a home that benefits much.

 

[Balt]

Mortgage Interest Deduction mostly benefit people making between 50,000 to 250,000 a year, after that the limit on the MI deduction make it less beneficial, and before that you are unlikely to afford a home that benefits much.

I would say the graph at the link I provided shows that benefits are weighed more heavily toward the higher end of the income range you provided, but then I don't consider households that earn $200,000 to be "rich" either. I'd say they are "well off". Arguably they may still be in less need of MID, keeping in mind that they are buying homes that are well above their yearly income.

That being said, where is the benefit capped? A quick google search suggests $1,000,000 (correct me if I'm wrong). Where does the loss in benefit occur before that?

 

[EagleKeeper]

realize that your rent is being subsidized through tax breaks

 

[Balt]

realize that your rent is being subsidized through tax breaks

In what way? Property taxes? I assume (perhaps wrongly) that the company I rent from pays these and passes on the costs.

Honest question.

 

[DCal430]

I would say the graph at the link I provided shows that benefits are weighed more heavily toward the higher end of the income range you provided, but then I don't consider households that earn $200,000 to be "rich" either. I'd say they are "well off". Arguably they may still be in less need of MID, keeping in mind that they are buying homes that are well above their yearly income.

That being said, where is the benefit capped? A quick google search suggests $1,000,000 (correct me if I'm wrong). Where does the loss in benefit occur before that?

Yes their is a limit of 1,000,000 in mortgage debt, and I assume 1,000,000 mortgage usually goes with 200,000 to 300,000 in income a year.

 

[Balt]

Yes their is a limit of 1,000,000 in mortgage debt, and I assume 1,000,000 mortgage usually goes with 200,000 to 300,000 in income a year.

Fair point. So those earning say $2,000,000/yr buying an $7,000,000 home probably aren't going to derive any more raw dollar benefit from MID than those earning say $300,0000 buying a $1,000,000 home. Still, do those earning $2,000,000 need to receive the same dollar amount tax break as those earning $300,000?

Separately, even for mid-level incomes (using the term mid-level income very loosely) the benefit doesn't seem very scaled. Those between $50,000 and $100,000 yearly income (combining two of the bars on the graph) receive far less in tax breaks than those who are $100,000+/yr (13.5 billion versus 52.6 billion). Of course the upper income crowd is still paying more with each mortgage payment, but it's still a "subsidy" of sorts.

Perhaps there are more families in the $100k+ and $200k+ brackets than in all those underneath, but I kind of doubt it.

 

[Drako]

With today's low interest rates, it's sure not what it used to be. :biggrin:

Back when I bought my first house, mortgage interest rates were in the 12% range, so it made a huge difference.

 

[Matt1970]

Tax credits aside after 30 years of renting you own nothing.

 

[spidey07]

It's not a subsidy at all. A subsidy would be a tax credit. This is nothing more than a deduction that benefits society as a whole.

If you want to take advantage of the deduction then buy a home. If you really want to smash this economy into the shitter, one very simple way to do it would be to eliminate the mortgage interest deduction (which obama has stated he wants to do).

To make a comparison, is the deduction of tuition and education related expenses a "subsidy" or more like an "incentive"? Same with the mortgage interest deduction, it's an incentive and not a subsidy.

I maxed out my mortgage right at jumbo limit and then another 100k HELOC all because of the deduction and incredibly low rates.

 

[Balt]

But if you buy no home you get the standard deduction for doing nothing to boost the housing market/economy/local tax base and, depending on your income, yet can get free $$ for your kids because you had sex. Not fair, I say, cut out all deductions/credits. Let 'em eat cake.



Full disclosure: I don't have a mortgage.

I'd be okay with this too, since I don't have kids.

 

[Balt]

It's not a subsidy at all. A subsidy would be a tax credit. This is nothing more than a deduction that benefits society as a whole.

If you want to take advantage of the deduction then buy a home. If you really want to smash this economy into the shitter, one very simple way to do it would be to eliminate the mortgage interest deduction (which obama has stated he wants to do).

Eh, depends on how you define it. Where you stand depends on where you sit, as always. A tax deduction that you get that I don't get simply because of where you decided to spend your money is a subsidy in my eyes. As a homeowner, you will disagree, just as you should. You can say that a house is an investment, which is it, but in that case your profits should come from the appreciation of the property (your investment), not a tax break.

Given the state of the housing market and the economy in general, I'm not necessarily in favor of ending the MID outright. I wouldn't object to scaling the benefits and/or eventually phasing them out entirely, however. At the moment, there's a lot of money with this deduction claimed by very wealthy people. I don't think dialing that back will kill the economy since they'll still have plenty of discretionary income left over.

 

[spidey07]

A deduction is not a subsidy, a credit is. Home ownership also creates jobs so it doesn't really matter if "rich" people get the deduction as again it's an incentive and the secondary job creation is good for everybody. There really is no down side to be made of the deduction.

 

[JesseKnows]

In this conversation about the MID limits, don't forget AMT which bites into all deductions.

 

[tgferg67]

The purpose of the mortgage-interest deduction is to encourage people to buy homes.
It should be tweaked for it's intended purpose.

 

[Anarchist420]

Personally, I think they should make principal and rent tax deductible just like they should remove the limit deducting health care expenses and replace it with nothing.

Also, taxable income shouldn't include anything other than cash salaries and wages.

Finally, they should do away with the standard deduction and replace it with an exemption of 15k (30k for joint filers) and the AMT should be reduced.

 

[Fern]

First, full disclosure: I am a single apartment dweller. That's probably why I rant about itemized tax deductions. That being said, I recently discovered (before even seeing this blog) that owning a home would not be as beneficial from a tax standpoint as I once thought. That's because I would be buying a modest home if I decided to jump in the market (which I have considered numerous times). In fact, home ownership would probably not be beneficial at all in terms of taxes.

http://jaredbernsteinblog.com/heres-what-an-inefficient-tax-break-looks-like/

Now, obviously, some are going to say that "Well of course people with higher mortgages get more benefit." That's true, they get more benefit. They may be the only ones who actually benefit. Is that the way it should be? Should we subsidize (through tax breaks) home ownership for the people who spend $500,000 on a home, but not those who spend $200,000?

IMO, either provide greater benefit through tax breaks to the lesser among us and curtail those for the greater or just scrap the tax breaks entirely. I don't see the point of subsidizing those with greater means so heavily.

Of course the regular rules should still apply. People shouldn't be provided with mortgages they can't possibly afford. I'm not advocating another housing bubble. Let's please leave that aside in this thread.

IMO, the MI deduction is not there to benefit home buyers, it's there to encourage the construction industry.

I.e., the author of the article is looking at it all wrong IMO.

Consider: Who has lobbyists? Is it home buyers or is it the construction and banking industries?

Fern

 

[spidey07]

IMO, the MI deduction is not there to benefit home buyers, it's there to encourage the construction industry.

I.e., the author of the article is looking at it all wrong IMO.

Consider: Who has lobbyists? Is it home buyers or is it the construction and banking industries?

Fern

There are a whole lot of other industries that benefit from home ownership.

But you're correct, those that stand to gain the most are banks and construction. The side effects/industries are pretty damn good as well is my point.

 

[ivwshane]

Just to be factual, a deduction is a form of subsidy. A tax deduction in laymen's term usually isn't considered a subsidy. Subsidies can either be direct or indirect, ie a tax break or actual cash. It's basically a benefit that one wouldnt receive otherwise under the same conditions.

 

[lotus503]

First, full disclosure: I am a single apartment dweller. That's probably why I rant about itemized tax deductions. That being said, I recently discovered (before even seeing this blog) that owning a home would not be as beneficial from a tax standpoint as I once thought. That's because I would be buying a modest home if I decided to jump in the market (which I have considered numerous times). In fact, home ownership would probably not be beneficial at all in terms of taxes.

http://jaredbernsteinblog.com/heres-what-an-inefficient-tax-break-looks-like/

Now, obviously, some are going to say that "Well of course people with higher mortgages get more benefit." That's true, they get more benefit. They may be the only ones who actually benefit. Is that the way it should be? Should we subsidize (through tax breaks) home ownership for the people who spend $500,000 on a home, but not those who spend $200,000?

IMO, either provide greater benefit through tax breaks to the lesser among us and curtail those for the greater or just scrap the tax breaks entirely. I don't see the point of subsidizing those with greater means so heavily.

Of course the regular rules should still apply. People shouldn't be provided with mortgages they can't possibly afford. I'm not advocating another housing bubble. Let's please leave that aside in this thread.

It benefits the banks that loan you the money, its really corporate welfare.

I own multiple properties and have a mortgage on my primary residence.
I only carry the mortgage because the interest I pay is less than the amount of money I am making off the capital.

If you were going to but a house for numerous other reasons then the mortgage deduction is a nice to have. but using it as a factor for consideration on whether to buy or not I think is looking at it wrong.

 

[mwilliams8705]

Do away with it.

 

[highland145]

I'd be okay with this too, since I don't have kids.

Just to be factual, a deduction is a form of subsidy. A tax deduction in laymen's term usually isn't considered a subsidy. Subsidies can either be direct or indirect, ie a tax break or actual cash. It's basically a benefit that one would receive otherwise under the same conditions.

So, OP, willing to give up your standard deduction, like ivws has said?

Put up or shut up.

 

[Balt]

So, OP, willing to give up your standard deduction, like ivws has said?

Depends. Are we talking about a simpler tax code? Are others giving up their deductions as well? Then sure. If I'm being asked to give up my small part while those who earn much more than I do continue to rake in higher deductions and pay a lower effective tax rate by itemizing, then no.

We're venturing into a broader topic with such discussions, though. There are plenty of wealthy people who pay lower effective tax rates than those in the middle class. I don't think this is disputed.

Edit: Sorry, my quote missed your "Put up or shut up" Thanks for adding that Clearly your challenge is going to require me to "put up", since none of these deductions are going away any time soon. Shall I write a check to the Treasury and post in online in the hopes that everyone else in the country does the same to prove myself to you?

 

[Fern]

Just to be factual, a deduction is a form of subsidy. A tax deduction in laymen's term usually isn't considered a subsidy. Subsidies can either be direct or indirect, ie a tax break or actual cash. It's basically a benefit that one wouldnt receive otherwise under the same conditions.

I don't agree.

First I abhor blurring language/terms for political points.

But our income tax system is based on net income. Deductions are not "subsidies", but instead are necessary to arrive at net income. A tax on gross income would be unconstitutional.

Granted, politicians have polluted our net income tax system and have allowed for some illogical deductions in hopes of incentivizing some behavior (or rewarding lobbyists, depending upon you POV). Heck, they may even want to subsidize something. But technically a deduction is a necessary item in arriving at net income.

Fern