The new forums will be named Coin Return (based on the most recent vote)! You can check on the status and timeline of the transition to the new forums here.
The Guiding Principles and New Rules document is now in effect.
Mortgage Interest Deduction & Housing Policy
Thanatos
Registered User regular
Registered User regular
So, the above post was a reply to my advocacy of eliminating the mortgage interest deduction. It's fairly on-topic for the presidential debate, but I think it's probably more suited to its own thread.The Dude With Herpes wrote: »Yeah, you're gonna have to elaborate here because I honestly don't think you know what you're talking about; and it's annoying me you're making me even moderately agree with Spool.
I am decidedly middle class and the mortgage interest rate deduction helps us out a lot. Any deduction, in fact, that puts us over the standard deduction is a benefit, thus it helps.
Sure it didn't help us buy a house, but it doesn't hurt us in paying for our house which keeps us out of forclosure since we're underwater, but trying to be responsible, which helps, no matter how small, the housing market by not having yet another repossessed house on the market.
And there are programs out there that helps with down payments; off the top of my head since it applies to me directly, there's VA loan assistance for vets that guarantees a 100% mortgage; which obviously only helps vets, but any program is going to be targeted and not universal.
So yeah, you're gonna have to elaborate instead of just stating things you assume to be true but aren't presenting any evidence for.
@The Dude With Herpes, I want to start by saying that I hope "being responsible" isn't your only reason for sticking with your house. I hope you've looked at your financial situation and decided that not defaulting on the loan is in your own best interests. Because if positions were reversed, and the "responsible" thing for the bank to do was keep paying you, but the thing in their financial best interests was to bail and stick you with an underwater house, they would bail in a hot fucking second. Keep in mind the banks got a huge bailout from the government in order to cover their financial losses from the housing bubble that they created; you didn't. So, if you haven't already talked to an accountant or bankruptcy/tax attorney about defaulting on your mortgage, I highly recommend you do so. Like, can't recommend it enough. The more underwater you are, the more likely a default is to be in your best interest. Do not indenture yourself to the bank for the next twenty years to avoid seven years of bad credit; being underwater on your mortgage is also going to give you bad credit, and at least bankruptcy has a definitive expiration date.
With that out of the way, we'll move on to my actual points about the mortgage interest deduction:
1) It's regressive. To begin with, it's a tax deduction. Tax deductions are inherently regressive, because they benefit people who make more money more than they benefit people who make less money. If you and your wife are pulling in $140,000 a year, every dollar of interest you pay on your mortgage costs you $.75. But if you and your wife are making $500,000 a year, every dollar of interest you pay on your mortgage is only costing you $.65. If the two of you somehow manage to afford a home when the two of you are making $70,000 a year, then every dollar of interest is costing you $.85.
Second, it's a "below-the-line" deduction. What this means is that you have to itemize your taxes in order to take it, and can't take the standard deduction ($11,900 if you're married, filing jointly). So, say your house is a $200,000 house (slightly above the average for the U.S.). You're paying a 7% interest rate on it (this seems fairly reasonable to me, but I am not an expert; this is pure gut). So, the first year you have that mortgage you pay $14,000-ish. If you have no other deductions (and a lot of families won't), and you're in that 25% bracket (you and your wife make $140,000 a year), you get to deduct $14,000 from your taxes, meaning you've saved $3,500 because of the mortgage deduction, right? Well, no, because without the mortgage deduction, you would be taking the standard deduction of $11,900, only $2,100 less than the mortgage deduction, meaning you've actually only saved $525. Nothing to sneeze at, but when we look at someone in a million-dollar house at the same interest rate saving $20,335 instead? Yeah. Note that that million dollar house costs five times as much as your $200,000 house, but the government subsidizes it for almost forty times as much.
2) It doesn't really help anyone buy a house, it just helps people buy bigger houses. So, as pointed out above, $525 a year almost certainly isn't going to make or break whether or not you're going to be able to afford a $1,400 monthly mortgage payment. But even if we take the difference between a $200,000 house and a $300,000 house, we see that the savings go up to $2,275 a year. So, that's just about an entire payment, instead of a little over a third of a $1,500 payment. The bigger the house you buy, the bigger your subsidy.
This is even worse from a perspective of environmental policy. It encourages low-density housing, which encourages suburbs, places that are pretty much impossible to serve via mass transit, take a ton of energy to climate control, and impossible to put near commercial centers where people typically work and go to for recreation/services/retail.
3) It distorts the housing market. As I pointed out above, it creates an incentive to build larger, more expensive houses further out from town centers. Furthermore, it drives up the costs of housing for everyone, since the real estate people, the banks, et al know you're going to be getting that writeoff. It causes people to be willing to pay more for their houses, which drives up the prices. So, the primary beneficiaries of the mortgage tax writeoff end up being the banks, the developers, the real estate agents, and the insurance companies. Further, because it's a writeoff on the interest, it encourages doing things like, say, writing up an "interest only" loan where you plan to refinance in a couple years when it goes from fixed-rate to variable, because hey, that interest is tax-deductible, right? And in a few years, your house will totally be worth more, so you won't be as high of a risk, and you'll be able to get a better rate, right? And how did that work out for us?
So, what do I think is a better solution? Like I said in the thread, I think down payment assistance is better. First off, a lot of people who may be able afford a house payment can't afford to save up enough for a down payment, or may put off purchasing their house until later in order to do so. Second, with a reasonable cap, this wouldn't be anywhere near as regressive as the mortgage interest deduction is. Third, because payments wouldn't be deductible, the incentive to buy a much larger house is greatly diminished (especially with the cap).
What about people who already own their homes? Well, this would drive down home prices, and increase their costs. I would be open to grandfathering them in, allowing interest on mortgages made before the law went into effect to still be tax-deductible, up to a reasonable cap. We could also allow an amortized writeoff for the decreased value of the home.
So, now, I'm sure there are several people who want to tell me how wrong I am (probably @spool32 most of all). I invite you to bring it. I also invite discussion of other alternatives to the mortgage interest deduction, since I'm sure some of the people here have some great ideas.
Edit: This is probably a bit narrow for one thread, so I'd also like to open it up to general housing policy discussion.
Thanatos on
+8
Posts
Also, there is no reward for being a "moral" debtor who pays back all his debts with heroic effort. Modern finance has erased it; your bank has already taken the possibility of default into account and you've already paid the bank for taking on that risk. You are doing no wrong by taking an option already outlined in the deal if it is in your own material interest to do so; the bank went into it with full knowledge.
the cap is interest on one million USD per household, it seems... is this an accurate description of the gist of it, or is there some detail buried somewhere we should know about?
Actually that's largely driven by land use policies and zoning rather than through the finance side. The mortgage interest deduction can be applied to condos as well, its just that municipalities make it illegal to develop a lot as multi-family housing rather than single family owner occupied homes.
However, this points to a different issue. Because there is no rental subsidy (at least not at the federal level) this means that you are essentially using the tax code to transfer dollars from renters, who are typically poorer and younger, to owner-occupied dwellings, who are typically older and wealthier. Which aside from being backwards in terms of social policy, also puts a marginal downward pressure on multi-family apartment buildings, thus restricting supply and driving up rents when you hold everything else constant. Which, again, tend to be regressive due to the demographics of the people who occupy rental units.
one million on the mortgage plus one hundred thousand home equity?
can't find anything authoritative on pro-rating above that, it's all "regarded as personal interest". is this an accounting trick above that amount or what
@Thanatos it's cool, education, discussion and debate, is never a bad thing.
To go over your OP points:
1) I get that, but you're trying to apply an unrealistic expectation into taxes; i.e. assuming tax code should be progressive when that's not an inherently true or false proposition, it is just not that simple.
For me, it's fine, if someone wealthier than us gets a greater benefit, as long as I still get a benefit and it isn't doing a reach around screw me over; which in this case it's not. We're definitely a the low end in how much the tax deduction benefits us for our household income, so yeah, there's a whole plethora of people who get more benefit from it. But we benefit from it. Remove it and....?
I'm not arguing that there shouldn't be more equality in the tax code; I'm a fan of people paying their proportional share; but at the same time there has to be limits. Yeah, our mortgage deduction only saves us about $2k a year but that's $2k that we wouldn't have otherwise had.
That we have to itemized deduct it isn't a thing, for us, because we do itemized deductions anyway. Our household income is just a bit above $75k; but since we tithe (a charitable deduction I know you also have issues with EDIT: actually I'm not sure if you do, I was thinking of Atomic Ross) we already have a fairly big number to start our deductions from.
I'm all for a simplified tax code, but at some point you're gonna get so simplistic that the 'solution' would be a progressive flat tax when I'm pretty against on principle. Whether or not the mortgage deduction could be done better doesn't mean that I shouldn't take it now and that it doesn't benefit me. And that it could benefit me more doesn't negate the current benefit I get. I don't think there's anything wrong with taking the time to do your own deductions vs taking the standard one should you have more deductions than the base one; choice and control is never a bad thing, and having the options gives greater benefits to those who would otherwise be under the standard deduction, and power to those who are over.
Which was my core problem with your post over in the other thread; the implication that because it benefits others more, it is somehow bad for me. I can't buy that 'all or nothing' line of thinking; it's the equivalent of saying "well, since we can't do it 100% right we shouldn't do anything at all" which is profoundly counterproductive; particularly in the realm of government and politics.
2) I already agreed with you that it doesn't help anyone buy a house. But I think you're overstating the effect it has on how much people buy; I think lending practices has a far greater effect on that; you'd have to be highly educated in how much you could deduct from your interest yearly to factor it into morgage payments to determine how much more you could buy; and even then you're looking at extremely expensive houses before the deduction is high enough to meaningfully effect your buying power; meaning that yes, in principle you are correct, but again, I think you're simply overstating the effect because the amount of people capable of buying the price where this becomes a real choice maker is pretty small in the big picture.
I'd say more people are like us and are going to use that thousand or two dollars a year deduction and use it to, whatever, buy a TV or something; which helps elsewhere in the economy, theoretically.
3) Kinda the same point as 2. The distortion in the market didn't come from the interest deduction by any means; it came from lending practices, securities and insurance on those securities, among other things that made the clusterfuck of the housing mess. That people could deduct their interest was such a non player in the crisis that...come on.
Again, it's not that what you're saying is wrong, fundamentally, it's that you're greatly overstating the influence it has on what people decide and how much it effects prices.
Prices went up because there was a buying boom due to mortgage securities becoming hot ticket items, which lead to lenders loosening their requirements to allow people who should never have qualified to buy a house, do so (me and my wife included, but we knew exactly what we were getting into so we bought small and well within our budget; our level of 'underwater' is pennies compared to most. But the people, in general, making the decisions to buy houses they couldn't afford weren't making those decisions based on the interest deduction, they were basing it on the expected increase in value and being able to flip it or take out equity in order to make money; which should have been obviously unrealistic to anyone who paid attention to housing prices...ever.
4?) I'm all for assistance for down payments and things like that; but those down payments play a much smaller role in the interest deduction than you're implying. Yes, the 20% mortgages are typically a decent bit higher interest rates than the 80% mortgages are; but most mortgages front load the interest, so on that 80% for the first many years you're effectively only paying interest. So yeah, under normal circumstances when you need a 20% down payment to qualify for a mortgage, assisting individuals with that, with todays high house costs, is a wonderful idea; never said or implied it wasn't. There are programs that help with that, the VA loan guarantee, as I mentioned, and I'm sure there are others but I've never needed to look it up because of the VA assistance I can get, should I need it.
However that doesn't remove the burden of paying so much on interest for a modern 30yr mortgage. You can question whether or not anyone should get assistance for that, and that hasn't really been touched upon; but I'd argue that a home owning population is better for various reasons for the country, and thus, yes; like giving assistance for down payments, easing the burden of owning, in any meaningful way, is beneficial.
The problem, as you see it, with this, is that by the numbers, those who can afford more will always be provided more assistance. I absolutely see the problem with that, and don't necessarily disagree. However, removing it purely to avoid that hurts too many people at the cost of the few who will take advantage of it (kinda like how silly the bureaucracy for things like unemployment, welfare or medicaid is when the amoutn of people who actually abuse it is insubstantial, but that boogyman has created a huge cost burden in trying to avoid it). I'm all for a better, more equitable system, but it could be built upon the existing system; it doesn't have to remove it and take away the benefit from those who actually need it.
tl;dr I'm sure my post in the other thread was a lot more snippy that it needed to be, so sorry about that.
But what I'm saying comes down to is that you're simply overstating the impact that the deduction has, and how damaging it is to the market and to individuals. I get it, you want something more broad and fair, and while that is certainly noble, your overemphasis on this specific thing and how much influence in the market you're attributing to it is not reasonable. It's making a mountain out of a molehill, and while, again, there are absolutely ways to do it better; my immediate response was the idea you presented that it was universally bad, when it is patently not.
Again, you're not incorrect in most of your assertions, in principle, I just think you're incorrect in how much they influence things. EDIT: And I'm not arguing that we need to let bad policy stand; but at the same time without something to put into place to catch the 'fall', as it were, for people suddenly unable to take this deduction, just outright removing it is a bad plan. It's not a good idea to just assume that the majority of people deducting their interest are wealth and don't 'need' the money; I'd argue the exact opposite, most people using this deduction are like me, who are using it as a legitimate, but relatively small, tax decrease, which gives us more money to spend on other things we need, and sometimes don't.
Origin: Galedrid - Nintendo: Galedrid/3222-6858-1045
Blizzard: Galedrid#1367 - FFXIV: Galedrid Kingshand
http://www.irs.gov/publications/p936/ar02.html#en_US_2011_publink1000229991
ooh
so you spread it out over some years so it's always below the limit?
Source:
http://grist.org/politics/2011-09-22-tax-expenditures-a-boring-thing-you-should-be-outraged-about/
and
Figure 3: Treasury Tax Expenditures by Sector (History and Projections, $ Billions)
Lots of support for housing in there!
Also here's some more tax assistance given to homeowners:
§ 121 - Exclusion of gain from sale of principal residence
Gross income shall not include gain from the sale or exchange of property if, during the 5-year period ending on the date of the sale or exchange, such property has been owned and used by the taxpayer as the taxpayer’s principal residence for periods aggregating 2 years or more. The amount of gain to be exclused from gross income is to not exceed $250,000 if a single owner, or $500,000 if the taxpayers are filing joint.
This exclusion is provided meeting certain requirements, which are pretty easy to meet.
It seems fair to characterize both land use policy and mortgage interest deduction as the result of the same underlying political bias in favour of every existing generation of homeowners. Not really sure how to avoid this bias, though, it seems tied to the fundamental one where upper-middle-classes wield disproportionate influence.
Not necessarily zero sum, but the government does need to get revenue from somewhere in order to function and the most economically efficient way to do that generally isn't really by giving a lot of money to rich people and then making it up elsewhere.
Also:
I'm a little concerned about privileging saving in the form of primary residences at all, which reduces physical mobility as well.
It's the same inclination, but the policies and the people enforcing them are different and so the solutions/approaches necessary are different as well. Phasing out the mortgage deduction (likely over 31 years) would require an Act of Congress. Getting a high FAR apartment building with more units than parking just requires a zoning variance.
the liabilities hopefully will be offset by the value of the property, but if you liquidate the asset, your mortgage doesn't go away. when that happens, you have negative equity, or are said to be "underwater". your equity in the home, at this point is the $30,000, which represents the part of the house you actually own
That would only be true if your house immediately erupted into flames and you didn't have insurance. Even then you'd still have ownership of the land that your ashes sit on, which offsets those liabilities with its value.
additionally, the market value of the land goes up once there's something nice on it. once something nice is not on it anymore, the value will typically fall.
That largely depends on location, actually. In the middle of random suburb, not so much, but it is possible for the depreciating value of the home to be a drag on the appreciating value of the property. A meh house in a newly improving neighborhood is typically going to be more expensive to redevelop than raw land, so it can actually be less valuable than a vacant lot next door due to the built in costs of tearing shit down to build something new.
you'd figure this, but it's cheaper to bulldoze it than to fix it up. but as you said, it depends.
also, "it depends" is probably the most commonly used phrase in tax accounting and real estate. but I do not believe it is a stretch to believe that, even net insurance reimbursement, the value of the land would be able to cover the amount of liability.
but I guess it'd be a nice way to get a new boiler
These posts don't make sense unless you're assuming that the house in question is worth less than when the person bought it. In the first quote while you assumed $120,00 in liabilities you also gained a $150,000 asset and thus your net wealth didn't actually change, under the assumption that the price you paid for the house is what it's worth and excluding other costs. The second quote is also somewhat misleading since the bank can only deny the sale of a house if the sale doesn't cover the loan which makes perfect sense since the the asset backing the loan is the house.
But in the first one, your actual ownership, unencumbered by debt, is $30,000. You get a $150,000 asset, but you really only own $30,000 of it. The rest is encumbered by the mortgage. You do not have 1:1 equity in the asset. And yes, if you include the asset like you should, the net change in wealth is 0.
it's just that once you enter into that transaction, you are now on the hook for a sizable liability where previously you were not. you trade $30,000 of liquid assets to obtain ownership in something that is very illiquid. really I just think I mispoke and I think really what I should have said is that you're more substantially more susceptible to market volatility
No idea how much of this will apply in NZ though.
It’s not a very important country most of the time
http://steamcommunity.com/id/mortious
Eh, I don't see why it can't expand beyond US tax code.
Personally my only real knowledge of real estate comes from my background in architecture and being a bit of an urban planning nerd, so don't really take anything I say as useful. That being said, you need to view your home purchase as an investment that will depreciate rather quickly over time unless you are constantly putting money into it. That isn't necessarily a problem since you'd be paying rent instead of a mortgage anyway so its not like the option is free room and board v owning a big pile of bricks. To me, the thing that makes the most sense, if you plan on/want to live anywhere other than suburbia, is to own an apartment building rather than a single family home. Not, like, a huge building with a dozen units, but get a nice 3 flat or something small and live in the top floor. That way your real estate investment is actually paying you a check every month rather than just saving you opportunity costs from renting/acting as a store of value for future moves.
I could readily be wrong about this, like I said I don't really know much about the business end of being a landlord. But it just seems like the best of all worlds. Do your best to make sure that your 3-4 tenants aren't terrible people and you likely won't have to do more maintenance than at your own place, and there might be somebody there to receive packages for you since FedEx is so terrible.
i will ask some people at work who do a lot of commercial real estate how it is on that side
The everyday business end of landlordery fucking sucks most of the time.
Bills necessary for survival (heat, utilities, food, medical, etc) should count as nontaxable income, and should included into an itemized deduction.
I also wonder if we should allow credit card interest deductions and car interest deductions, with the obvious caveat that car interest should be on high efficiency/electrical cars. Maybe with a bonus tax for cars above a certain value so someone driving a tesla $90k car doesn't get to mooch on the itemize deduction there.