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The mortgage deduction and its effects in the US
tbloxham
Registered User regular
Registered User regular
So, what with it being around the time of tax season a lot of us will have filed our taxes in recent weeks. And talk in the government is rife with the idea of closing loopholes and tax deductions. There is one deduction howeverAmongst those of us who earn a decent amount of money those of us who don't own a home and those of us who do will have had vastly different experiences. If you don't own a home, even if you took zero deductions from your paycheck you likely found yourself staring at a pretty hefty tax bill. If you did own a home, then you likely found the US government had a pleasant surprise for you in the form of a nice tax rebate. Why? Because home owners can deduct the amount they pay towards interest on their homes from their tax bills. So every year the US tax code effectively takes money from people who don't own a home and transfers it to people who do.
This policy has near universal support amongst realtors and homeowners. Why? Not just because it makes the homeowners a nice pile of cash each year if they still are paying their mortgage. It's also because it makes buying houses a more attractive prospect and drives prices up. Unlike all other investments you can make, the government will support you in buying a house by paying the interest for you. You can't do that with stocks and bonds, so home ownership becomes more valuable. This drives up the value of property compared to other assets, so it's good for homeowners even when they are done with their mortgage.
Builders and other people related to the home owning industry also support it, because higher prices means more building, renovating and repairs.
However the real question is, why do we have such a policy? Building houses does indeed create jobs, and having a permanent place to live has been shown to improve neighborhoods and lower crime etc. But the effect of this policy is to raise house prices beyond their true levels, forcing people to rent. And then people who are renting find it difficult to save as much money as their home owning equivalents because not only is the money they spend on rent simply 'gone' they are also being taxed at a higher rate simply because they don't own a home. This effect is exaggerated in high demand areas such as new york, san francisco and so on where house prices spiral ever upwards and the value of property allows higher and higher rents.
I'd argue that the mortgage deduction is effectively a tax on being young, not having wealthy parents, or being poor. It also (by inflating home prices by a larger amount in cities) drives people to move far from cities into rural areas where housing is cheaper, but the costs of providing services is higher, and the pollution from commuting is higher.
What does the forum think? Should the US end the mortgage deduction? Does it actually promote home ownership, or as I would argue, only appear to promote it by allowing people to buy homes whose true price has been inflated? Could the US end the deduction? How have other countries handled this issue?
This policy has near universal support amongst realtors and homeowners. Why? Not just because it makes the homeowners a nice pile of cash each year if they still are paying their mortgage. It's also because it makes buying houses a more attractive prospect and drives prices up. Unlike all other investments you can make, the government will support you in buying a house by paying the interest for you. You can't do that with stocks and bonds, so home ownership becomes more valuable. This drives up the value of property compared to other assets, so it's good for homeowners even when they are done with their mortgage.
Builders and other people related to the home owning industry also support it, because higher prices means more building, renovating and repairs.
However the real question is, why do we have such a policy? Building houses does indeed create jobs, and having a permanent place to live has been shown to improve neighborhoods and lower crime etc. But the effect of this policy is to raise house prices beyond their true levels, forcing people to rent. And then people who are renting find it difficult to save as much money as their home owning equivalents because not only is the money they spend on rent simply 'gone' they are also being taxed at a higher rate simply because they don't own a home. This effect is exaggerated in high demand areas such as new york, san francisco and so on where house prices spiral ever upwards and the value of property allows higher and higher rents.
I'd argue that the mortgage deduction is effectively a tax on being young, not having wealthy parents, or being poor. It also (by inflating home prices by a larger amount in cities) drives people to move far from cities into rural areas where housing is cheaper, but the costs of providing services is higher, and the pollution from commuting is higher.
What does the forum think? Should the US end the mortgage deduction? Does it actually promote home ownership, or as I would argue, only appear to promote it by allowing people to buy homes whose true price has been inflated? Could the US end the deduction? How have other countries handled this issue?
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Maybe install a modified version of it for first-time homes, up to a certain valued cap.
If we want to encourage homeownership, there are way better ways to do it; like down payment assistance, which, if we had had instead of the mortgage interest deduction, probably would have headed off the housing bubble collapse.
Additionally, I think a cultural shift would be really good for us. Right now, our priorities are all fucked up, in that home prices are the golden calf at which policy makers worship. The government's job shouldn't be to keep home prices high; this is one place where the free market can and should do its job. Let the housing market be more volatile; it will drive down prices, and let more people buy homes. The only people it will hurt are real estate investors. If you're planning on living in your home for ten or twenty years, you don't really give a shit if the price fluctuates some from year to year. It's only the people who like to buy and flip houses within a handful of years who benefit from always-rising housing prices.
Do we know how much the mortgage interest deduction inflates the prices of homes? I would have assumed that other things raise the price of homes much much more than just this deduction. I just bought a house so this deduction is pretty nice, but I would be fine with getting rid of it.
4% on a 150k mortgage would give you 6k in deductible interest; at the 25% bracket that's worth 1500 bucks.
That the same 6k in interest gives you $2100 back if you are in the 35% tax bracket is stupid.
That a 450k mortgage on the McMansion you just bought is subsidized at 3x the rate of a reasonable home is stupid.
I mean, if you don't mind my asking, how much did you pay in mortgage interest in 2012?
edit: I'll see if I can look it up online
edit2: $6,153.90
edit3: or, in other terms, 3 months pay.
Kill it. Kill it with fire.
It's very expensive, distorting, regressive, reduces labor mobility, and encourages indebtedness. You could hardly design a worse subsidy. There's an argument to be made that we shouldn't repeal it for another year or two to let the housing market recovery get further along first. But any such repeal would take a while anyway, so it's a moot point.
!!!
You, Sir, need to refinance right the fuck now.
much easier said than done =/
I've been trying for years, but due to 4 major factors (all out of my control) it is impossible.
edit: I don't want to derail the thread though, so I won't go too in depth.
I'm onboard with this idea.
Simply eliminating the mortgage deduction would cause huge issues. It would simultaneously make a lot of people who are struggling unable to pay their mortgages, and utterly gut the housing market. Yes, there is a housing bubble...it's not a good thing...but the solution isn't sticking a needle in it.
Even if you grandfather current homeowners, it still screws over people coming into the market (or having to move for various reasons) and again kills the housing market. Namely the young, the unemployed, etc.
I'd be a fan of tinwhiskers idea or a cap / phasing out the deduction at higher income levels.
*And why should we? Renting is a better choice for most people. You need to be very financially secure and employment stable for homeownership to make sense. It's a huge investment.
Yep. Pick any of:
-Reduce amount of interest deducted (95% to start, drop as needed)
-Hard cap on deduction, not indexed to anything (or indexed to median national income, would be nice)
Assuming you're single, don't have any other deductions, and are in a 25% top marginal rate, the mortgage interest deduction is saving you $63.48 a year.
So, rather than an electric bill, it's more like a new video game, assuming you live in a state with a low sales tax.
Cost of deduction to federal government: $80 billion per year.
Number of owner-occupied homes: 75 million.
So just give all homeowners a $1,000/year refundable tax credit. Same cost, same subsidize; none of the crazy, OMG, insane distortions and malincentives. I still don't think we should do it, but it would be so much less bad.
Not all people with jumbo mortgages are living in McMansions.
Why not encourage renters to save? Give them a tax credit on rents paid equal to the prime rate and have that credit deposited to an account that can only be used for a downpayment.
Is that your mortgage payment, or just the interest portion? If you're paying a quarter of your pay just in interest, you're bankrupt. Go file.
EDIT: Nevermind. Two-income household. Then it may be sustainable.
married, 2 kids and I have no clue what the 25% top marginal rate is.
If that's all I'm being saved though I guess I'm down with axing it. I mean if I spend 1/4 of my income on interest and it only saves me $63.48, then I can't imagine many would be hurt by killing it.
I don't think that's right? If he's deducting (roughly) $6000 from his taxable income, and has a 25% marginal rate, it should be saving him $1500.
On the main thread topic- yes, it's silly, but since it's not going to go away any time soon can we get a tax deduction for rent, too? That would be nice.
I would absolutely love to see caps on deductions that are directly indexed to something like the poverty line, median national income, etc. Make the rich people have some stake in improving incomes and standard of living for people at the bottom. As it stands, they don't really have any 'skin in the game' so to speak.
In general, I'd love to see a hard cap on deductions that's equal to say...20% of the median income, or something like that. Wishful thinking, but it would be nice.
With the mortgage insurance deduction, I could see this phased out over ten years - deduct 100% this year, 90% next year, etc. It's slow enough most people can adjust, and those that can't probably are going to need some intervention either way. After ten years most mortgages will have paid down a reasonable amount of interest anyway...
The 'renter credit' that can only be used for down payment on a home is an intriguing idea as well. I'm going to have to chew on that one a bit. As it stands, it makes no sense to rent if you can get a mortgage.
Whoa whoa, this thread is about how great the deduction is for the middle class -- not yet another venue for you The Poors to beg for more handouts.
I think it's the difference between that and the standard deduction.
I mean, I don't want to derail either, but you make a good case study: a homeowner who is struggling with their mortgage payments, who could legitimately use some help, and is benefiting from the mortgage interest deduction little, if at all.
A copypasta of an example of the sort of napkin math I'm doing here:
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.
Personally, if I was trying to structure a program that would help people, I would find ways to make rent-to-own schemes more common and portable. I'd also figure out ways to discourage contractors from upbuilding.* As it is, the housing and rental market are fucked up enough that they are both discouraging movement of labor.
* So long as a builder can invest an extra 10 to 25 percent in building costs and double and triple the ultimate price of the house, the market is going to overbuild McMansions. One of the main problems with the excess inventory the banks are sitting on is that the houses are simply unsuitable for the majority of Americans. Even if they could afford the price of the house, the heating/cooling and maintenance costs are too extreme for most budgets.
I do file jointly and my loan was 95k on a 125k house at 7.25%
I make all of 36k before state/federal/medicare/ss/fica/whateverthehell is on my check under "deductions this period" (effing poor).
edit: and I'm more than happy to be a case study for this thread!
Its hard to take an argument seriously that uses fuzzy math and exaggerated claims.
Thanatos spells it out a lot better. The cap seems to be fairly generous, though. It may be nominal compared to the standard deduction for those of us in reasonable homes and mortgages, but being able to deduct the interest on a $1,000,000 mortgage seems incredible.
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As we saw by example, an actual low-to-mid-income homeowner doesn't stand to actually save much, because here's the thing a LOT of people don't realize: you lose your standard deduction. And for a mortgage on a modest home, at a reasonable interest rate, guess how much your interest in a year tends to come out to...about the same as the standard deduction. I think the first couple years we saved a couple/few hundred dollars through the home mortgage interest deduction (we were at 5.5% on a $205K mortgage). It's significant, and can be more so when you move down into lower incomes with higher interest rates...but as it's structured now?
You can take it on second fucking homes.
That's batshit insane.
There's no reason we can't cap the amount of the mortgage (even pegging it to housing costs on a per-zipcode basis...we have that data already thanks to military housing allowances). There's no reason we can't phase it out after a certain level of income. And for fuck's sake there's almost zero reason ever to allow one penny to be deducted for a second home (for a few cases, such as geographically separated couples, we can work it another way).
Really, the home mortgage deduction gets a lot of support because the upper-middle class (and the sillier elements of the middle class) like to use their home as a piggy bank from which they can withdraw equity, thus always maintaining a nearly "full" mortage on their home, and because a lot of people have no understanding whatsoever how much (or rather how little) this would actually save them if they finally bought a house (which they can't afford). Or the standard aspirational thinking that permeates every economic policy in this country. Newsflash, buddy: if in fact you ever manage to buy a house, the amount this deduction will save you will be minimal, and will go down every year, until after a few years where it becomes better just to take the standard. Yay!
Next up: I explain to you that being married does not save you in taxes unless you have a specific income ratio with your spouse or you have kids. Otherwise, you actually pay less in taxes if you are single. To the point that the IRS had to pass regulations preventing people from divorcing every December and remarrying every January, if you don't fucking believe me. Because people were doing that.
We have maybe two or three posters here that might be exceptions to that.
But I cannot say it enough times that the current home mortgage interest deduction, as it sits, is absolutely fucktarded.
It counts as a second home. Yes - you can deduct your yacht's interest.
Now I'm wondering if you met those qualifications, you could deduct interest on your private jet loan...
EDIT - what I'm finding appears to be 'yes, you can deduct your private jet as a second home'.
They are paying a portion of your interest equal to your top marginal rate on whatever amount of home mortgage interest plus other deductions* you can claim in excess of the standard deduction.
Which, for an average-income homeowner in a median-cost house, even assuming they're new in their mortgage**, means a low double-digit percentage of at most a few thousand dollars...or hundreds of dollars at most.
* - You may have some of these. You'll probably be surprised to learn how few, because most of the things you've "heard" you can deduct have minimums in relation to income, etc., that mean you don't get to.
** - I'll assume a majority here understand how amortization works, but just in case the reason is that in a standard mortgage the interest is front-loaded to keep payments fixed over time, so your deductible amount goes down every single year.
Now, back to Xaquin's case study: let's assume that instead of a mortgage interest deduction, the government had a matching down payment subsidy. Let's put a very low cap on it, and say that the government would match the first $5000 of a down payment. Instead of $0 a year on that $90,000 @7%, Xaquin would have $5000 less in principal to pay down in the long-term, and in the short term, would be saving ~$350 a year in interest. The million dollar home? Would no longer get the $20,000 back, and would instead be saving... ~$350 a year in interest, on top of the $5000 in principal. Far more equitable, way more helpful to Xaquin, and gets rid of the encouragement to buy enormous homes. On top of that, encourages people to put down down payments. If we were to get rid of the mortgage interest deduction in favor of, say, a $10,000 50% match on homes that people could take advantage of once every 3-5 years, we would not only save poorer people way more money, but also give access to homeownership to people who couldn't otherwise afford it, and get rid of much of the incentive to take interest-only loans.
It has its various reasons for existing but none of them are particularly compelling. I am a bit concerned that it is the government incentivizing debt, masquerading as the government incentivizing home ownership.
I don't know where $68 came from but I save thousands of dollars every year on it. I think it was a $3,500 savings this time around.
My main thing is this: this has existed for as long as I've paid taxes, and I've taken advantage of it since back when I qualified for low-income assistance in buying my first home. In other words, since I was pretty young and pretty not rich. Therefore, call it "removing a deduction" all you want; it would in effect be a massive increase in taxes for me. Recent tax increases have already completely swallowed up recent increases in my income, so despite having more responsibility and experience I'm taking home the same money I was years ago. Further tax increases at some point will make the Laffer curve and other libertarian theoretical arguments become an actual thing for me, where I question why the hell I'm bothering trying to do any better. If I owned a McMansion and $3500 wasn't a lot of money to me, I might feel different.
Also, it's not like I can just hop into a less expensive home to adjust.
And I'd question why we need to. What would the money be for? Would there be tax breaks in other areas to even it out?
Also, I would like to see pretty much every homestead exemption ever done away with. Basically, we need to get away from the idea of a person home being different than any other investment.
I'd be curious, if you're comfortable sharing, what the details of your situation are such that you save that much. How much is your combined family income, total amount of mortgage, rate, number of years into mortgage, have you refinanced and/or taken out equity, etc.
I know I didn't save that much. Not over the standard deduction. Did you calculate it both ways, or is $3,500 just the amount of your home mortgage deduction (not offsetting for the alternate standard deduction)?
And it's regressive because for everybody whose mortgage interest is less than the standard deduction, which is presumably going to be a lot of lower-income folks in smaller houses, it gives them absolutely zero dollars. Whereas for those with larger homes (and presumably the larger incomes and higher marginal rates that go with them) it gives them more. I expect it's actually progressive or at least relatively neutral after a certain break point, but at the low end? When a ton of low-income people get zero benefit, it's regressive in my book.
And unless you have some other deductions going on, you can't just say "I'm paying $10,000 a year in interest and am in the 35% marginal bracket, therefore this is saving me $3500." You have to take into account the fact that you pass up the standard deduction in order to take the mortgage deduction. It obfuscates the scale of the regressiveness if you don't do that, and artificially enhances the benefits poor people get from the deduction.
I mean, unless you're tithing, or giving a lot to charity, or running a business, I suspect the mortgage interest deduction isn't benefiting you anywhere near as much as you think it is.
At the very top end, where you're at over $1,000,000 homes, it gets progressive. Of course, this is progressive from the point of view of someone who owns a million-dollar home, so...