Mortgage Interest Deduction

[Gaius46]

You think home buyers don't? I was in the business for 30 years. The interest deduction is near the top of the home buying decision.

It's also a major player in investment decisions. Take it away from investment property, rents will skyrocket.

Is that because it makes the purchase affordable or because it makes purchase more sensible financially than renting? In the case of my house the mortgage interest deduction makes my mortgage significantly smaller that renting a similar sized house. Actually it puts my mortgage costs on par with renting space in someone else's house. Of course that doesn't factor in taxes and maintenance so TCO is higher but that the price for my being able to make all the noise I want in the middle of the night.

 

[Conaeolos]

From a solely market point of view it may not in fact help the average Joe. Although, I honestly find myself neutral on the issue as its one part of a much large problem. Mortgage interest deduction has at least three quantifiable impacts: raises prices, encourages ownership over renting and shift the tax burn from owners to renters. All three impact have some very negative effects on the average Joe.

Some market negative consequences:
1. Lower to moderate incomes often have higher income instability and can benefit from flexibility offered by renting
2. Property taxes are a complicated beast and can very negatively affect owners in way renters can warned about and have phased in
3. Renter generally get properties fixed and up kept as part of rent payment where as these expenses are totally on the owner (more motived to keep in good repair) and are often are out of budget stimulating debt
4. Raising prices of property is based in artificial demand so the trend will yo-yo and crash
5. Many young buyers are priced out of the market
6. Net worth becomes tied into a high un-divested “asset” : equity
7. Inadequate insurance is common and can leave more people pocket in face of disaster, commercial operations have a better record
8. etc.

This real motive seem to me was two fold: landlords were social engineering people and we certainly don’t want that. Additionally, ownership is a social good for citizens. Property ownership was a huge part of elitist citizenship in history and now it is universal property ownership should be more common. In fact there are many benefits to ownership.

A move to the co-op model would honestly be the best approach. Scum landlords & profiteers are a real problem not going away, but if we were able to have a vast availability of cooperative housing ownership we could see many of the benefits of both ownership and renting. How is that going to happen? Who knows...

 

[jimbo]

Is that because it makes the purchase affordable or because it makes purchase more sensible financially than renting? In the case of my house the mortgage interest deduction makes my mortgage significantly smaller that renting a similar sized house. Actually it puts my mortgage costs on par with renting space in someone else's house. Of course that doesn't factor in taxes and maintenance so TCO is higher but that the price for my being able to make all the noise I want in the middle of the night.

Both.

The third factor is that people look at home ownership as an investment rather than throwing money down the rent rat hole. Mostly they're correct, but like any investment it doesn't always work out as planned.

 

[calamity]

I am absolutely saying most people do not calculate that into their decision making when it comes to whether they can afford a home or no. Also they are almost assuredly not getting the entire benefit of the deduction as they have to surmount the standard deduction before they start seeing any additional tax savings.

I think you are mistaken. For example, I took a mortgage on my home so I could buy an annuity with the equity. The tax deduction played a huge part in that calculation.

 

[jimbo]

From a solely market point of view it may not in fact help the average Joe. Although, I honestly find myself neutral on the issue as its one part of a much large problem. Mortgage interest deduction has at least three quantifiable impacts: raises prices, encourages ownership over renting and shift the tax burn from owners to renters. All three impact have some very negative effects on the average Joe.

Some market negative consequences:
1. Lower to moderate incomes often have higher income instability and can benefit from flexibility offered by renting
2. Property taxes are a complicated beast and can very negatively affect owners in way renters can warned about and have phased in
3. Renter generally get properties fixed and up kept as part of rent payment where as these expenses are totally on the owner (more motived to keep in good repair) and are often are out of budget stimulating debt
4. Raising prices of property is based in artificial demand so the trend will yo-yo and crash
5. Many young buyers are priced out of the market
6. Net worth becomes tied into a high un-divested “asset” : equity
7. Inadequate insurance is common and can leave more people pocket in face of disaster, commercial operations have a better record
8. etc.

This real motive seem to me was two fold: landlords were social engineering people and we certainly don’t want that. Additionally, ownership is a social good for citizens. Property ownership was a huge part of elitist citizenship in history and now it is universal property ownership should be more common. In fact there are many benefits to ownership.

A move to the co-op model would honestly be the best approach. Scum landlords & profiteers are a real problem not going away, but if we were able to have a vast availability of cooperative housing ownership we could see many of the benefits of both ownership and renting. How is that going to happen? Who knows...

Some of your arguments I agree with. Most I don't. Renting does give more flexibility. And particularly in a falling market that can be a problem. But that applies to any investment.

Property taxes are paid by the resident one way or the other, and I don't see them as complicated.

Maintenance is paid by the resident one way or the other.

Demand is demand. It includes both the negative and positive. Markets crash with or without the interest deduction.

Nearly all the real estate laws, including mortgage laws, are designed to enable low income and young home ownership. No down VA, FHA (HUD) are two examples. There are others.

Most if not all mortgages require adequate insurance. True that generally covers only the mortgage, but I know of few buyers who didn't opt to protect themselves at the same time. It's a few bucks more in PITI. In my experience, more properties are over insured rather than under insured. My home policy, for instance, includes replacement, not market, value coverage. and the furnishings at half the home replacement value. Both far in excess of actual value.

 

[Winchester]

I think you are mistaken. For example, I took a mortgage on my home so I could buy an annuity with the equity. The tax deduction played a huge part in that calculation.

That's a completely different scenario than buying a house.

 

[calamity]

That's a completely different scenario than buying a house.

Not really. Think about it.

I buy a house where I get $3K to $4K back on $12K in payments. Are you seriously going to try telling me I will buy that same house even if I get $0 back? :roll:

 

[Winchester]

Not really. Think about it.

I buy a house where I get $3K to $4K back on $12K in payments. Are you seriously going to try telling me I will buy that same house even if I get $0 back? :roll:

It sounds like you wouldn't be willing to pay as much for it. Also if one is getting $3-$4k tax benefit one is way on the high end of taxpayers and I'd argue such an individual doesn't need their homeownership subsidized. Sure it's nice but certainly not needed to promote homeownership.

 

[calamity]

It sounds like you wouldn't be willing to pay as much for it. Also if one is getting $3-$4k tax benefit one is way on the high end of taxpayers and I'd argue such an individual doesn't need their homeownership subsidized. Sure it's nice but certainly not needed to promote homeownership.

Ah, so it's political for you. I figured you had an agenda. Explains why you argued against obvious logic.

Everyone buying a house calculates in their tax deduction. It's significant, if they itemize.

 

[faithful_servant]

I could support removing the mortgage interest deduction for some...having it out phased out for those in high income brackets, and removing it for all but one's principal residence. Plus perhaps removing the deduction for those purchasing homes over, as an example, $3,000,000.

Removing the deduction for everyone would take many buyers out of the market. That would be bad for the average joe.

My thoughts exactly. We need to be doing what we can to encourage home ownership and this deduction has been a part of that. Keeping it in place for people making less than around $150,000 would be acceptable and then having a simple graduated scale on $250,000 increments reducing the % you can deduct until you hit the $2-3,000,000 mark.

 

[Winchester]

Ah, so it's political for you. I figured you had an agenda. Explains why you argued against obvious logic.

Everyone buying a house calculates in their tax deduction. It's significant.

No it's not really political to me.

Go back to the first link I did. https://www.fool.com/investing/gene...ortgage-interest-isnt-actually-tax-deduc.aspx Why Your Mortgage Interest Tax Deduction Doesn't Really Help Much

If the stated goal of the mortgage deduction is to increase homeownership, I'm arguing that no it doesn't and subsidizing hi-end taxpayers does nothing regarding homeownership, not that they pay too little or too much in income tax. If the impact is very little then we ought not have it.

 

[Winchester]

My thoughts exactly. We need to be doing what we can to encourage home ownership and this deduction has been a part of that. Keeping it in place for people making less than around $150,000 would be acceptable and then having a simple graduated scale on $250,000 increments reducing the % you can deduct until you hit the $2-3,000,000 mark.

I don't believe spending decrease when the IRS disallowed the personal interest deduction back in the 80s, no reason to think it will be anything but a temp blip on housing prices if they do the same thing to the mortgage deduction. Grandfather existing owners in and phase it out.

 

[calamity]

No it's not really political to me.

Go back to the first link I did. https://www.fool.com/investing/gene...ortgage-interest-isnt-actually-tax-deduc.aspx Why Your Mortgage Interest Tax Deduction Doesn't Really Help Much

If the stated goal of the mortgage deduction is to increase homeownership, I'm arguing that no it doesn't and subsidizing hi-end taxpayers does nothing regarding homeownership, not that they pay too little or too much in income tax. If the impact is very little then we ought not have it.

If people no longer can write off the interest and RE tax on their income taxes every year, they will buy homes that cost proportionally less. That number is roughly 30% less. Hence with fewer people willing to buy your home at $X, the price will drop proportional to the lost tax deduction, roughly 30%.

That is the logic. I doubt you can refute it.

 

[Winchester]

If people no longer can write off the interest and RE tax on their income taxes every year, they will buy homes that cost proportionally less. That number is roughly 30% less. Hence with fewer people willing to buy your home at $X, the price will drop proportional to the lost tax deduction, roughly 30%.

That is the logic. I doubt you can refute it.

You think there is going to be a 30% drop in home prices because of an average $1,918 tax benefit ($1,091 and lower for those Making less than $100k/year)? :lamo

 

[Moderate Right]

So now the middle class are "wealthy"? I understand you're not stating that but buy framing this as "poor" vs "wealthy" vast majority of homeowners - the middle class - are being lumped in with people who actually are rich.

I was just repeating what some lefties said, that the mortgage interest deduction furthers income inequality. Are you saying that lefties are wrong? If so, I'm completely on board with that.

https://www.nytimes.com/2017/05/09/...became-the-engine-of-american-inequality.html

https://www.forbes.com/sites/erinca...inequality-for-women-minorities/#5d36cc21422d

 

[fmw]

If people no longer can write off the interest and RE tax on their income taxes every year, they will buy homes that cost proportionally less. That number is roughly 30% less. Hence with fewer people willing to buy your home at $X, the price will drop proportional to the lost tax deduction, roughly 30%.

That is the logic. I doubt you can refute it.

It is most likely that an elimination of the mortgage interest deduction would lower the value of real estate and the price of houses overall. They might likely be able to buy the very same house.

 

[Gaius46]

I was just repeating what some lefties said, that the mortgage interest deduction furthers income inequality. Are you saying that lefties are wrong? If so, I'm completely on board with that.

https://www.nytimes.com/2017/05/09/...became-the-engine-of-american-inequality.html

https://www.forbes.com/sites/erinca...inequality-for-women-minorities/#5d36cc21422d

I know you were just repeating the argument.

And yes I am in complete agreement. Most homeowners are not wealthy. They're middle class people who work hard to be able to afford their homes.

 

[iguanaman]

I was reading something the other day where Trump was *considering the possibility* of eliminating the mortgage interest deduction while working on a tax cut package. Apparently many who rail against income inequality claim that the mortgage interest deduction increases income inequality because it favors the wealthy over the poor so eliminating this would be a way to kind of reverse this. I can see that viewpoint from their perspective. Now I don't really want to make this thread about tax cuts at all but about a debate over the mortgage interest deduction as to whether it should be kept or not or reworked in some fashion. I personally think people should be encouraged to buy homes but I wouldn't be against phasing out the deduction at rising income levels. In most cases I would also be against mortgage interest deductions for second homes except in very specific situations, oddly enough lawmakers who need a second home in DC as well as their home in their home states, comes to mind.

Ending the mortgage interest reduction is a way of making the middle class pay for the tax cuts for the wealthy. It has been a GOP dream for decades. It is already capped at a $500,000 loan for individuals.

https://www.cnbc.com/2016/12/01/heads-up-homeowners-mortgage-interest-deduction-on-trumps-chopping-block.html

 

[Conaeolos]

But that applies to any investment.

Ownership has traditionally viewed as a investment since housing prices were artificially risen to natural trend. You can’t actually extract profit from a primary dwelling outside some type of Airbnb style arrangement though so the only reason for elevated prices is higher demand and artificial constraint(low interest rates, morale deductions). The demographic and market conditions is not going to allow this trend to continue forever the demographics don’t swell so what would be a driver of higher demand: immigration? ….ownership is an investment like comic book, gold or a collector car. I will not deny the market may appreciate but it is very different from owning a real asset like a stock, bond or rental property and the fact people are forced to place so much of their net worth in such a manipulatable market is of deep concern to me(although that is bigger than a mortgage deduction).

Housing is a likely to be deemed a depreciating asset soon if the market doesn’t change, there is not 2-3 future buyers looking for their own household to every currently occupied home/property nor is the income to pay the exorbitantly overinflated prices in relative buying power available nor a demand for bigger and more elaborate homes. Already indebted future generation are starting the trend to delay ownership further and further and unless prices are going to come way down to meet a more natural supply-demand curve the deferral will turn to outright drop in demand.

Property taxes are paid by the resident one way or the other, and I don't see them as complicated.

True. They are however a negotiation between property owners and the district. So if you don’t think districts play on ownership to their advantage you must not own very much property. My cabin in Michigan for example is taxed double rate for no other reason than I am an out of state owner…taxes as debt with by businesses are efficiently balanced then passed to the consumers, taxes on individuals are direct burden and can not be phased or negation. They are what they are…

Property taxes don't go away but that are managed in way that are more manageable for your average Joe.

Maintenance is paid by the resident one way or the other.

Yes and owners are more likely to care for a property. That said, the norm is these expenses are out of budget for most owners where as accounted for by rental landlords. When maintenance is done on debt and not done efficiently (due to lack of tools etc) you find cost inflation. Maintenance is thus often more burdensome to owners than renters.

Demand is demand. It includes both the negative and positive. Markets crash with or without the interest deduction.

True that interest deductions are a minor player. Not true demand is demand. In Venezuela commodity prices were subsidized till government royalties couldn’t foot the costs. In the Untied states, interest rates and tax deductions are subsidized which artificially boosted demand and has created our current situation which is coming toward its end game.

We need to deflate that demand bubble to a manageable level as currently most americas net worth is tied to their “overvalued property” (in terms of the natural market verses market with the artificial boost). The crash needs to be managed now or it will be beyond painful for the average American who wasn't able to prep and if the foreign experiences tells us anything 8/10 it results in the government becoming the landlord of many people.

 

[Conaeolos]

Nearly all the real estate laws, including mortgage laws, are designed to enable low income and young home ownership. No down VA, FHA (HUD) are two examples. There are others.

Yet price remains king. If buying a home doubles a young persons cost of living, which in many cases it does as you need to up-buy for the future(since the only way to upgrade is to sell and refinance) verse rent to your current needs( as to upgrade one simply needs terminate a lease) you defer. Additionally, debt ratios come into play. Young people have more debt and lower incomes which means they qualify for less mortgage which reduces their budget which reduces what within their ability to buy. Prices meanwhile reflect that many can buy more than ever (like myself) thanks to low interest rates and inflation adjusted income...or people selling in silicon valley to get more bang for their buck.

Young people are priced out and the data shows it. They need the economic centre where the prices are high to get jobs, but have a limited ability to ultimo those gains. There is no less interest by young people they are simply not in a position to buy till much later and even than often need to buy less unless we sell to foreign buyers or multi-home buyers…getting us back into “renting” trend with all its pitfalls but now subsidizing landlords even if temporarily.

Most if not all mortgages require adequate insurance.

I don’t disagree with you there. Getting proper insurance however is not something most people do well. We are on average horrible at risk assessment, it's one reason insurance companies are able to turn their current profit margins. Many people are over covered in some areas they don’t need and under-covereded in areas they do. In terms of a likely disaster for one’s property - most are under-covered; in terms of unlikely disaster they are over covered. The same is true in many cases with health and life insurance with only car being anywhere near the ideal balance as a at fault crash or accidents are pretty strait forward and fairly likely in comparison. One other reason for this is for likely insurable events it is often better to self-fund an emergency fund - same with medical - this is lost on most.

If you think though in the even say a massive fire, most private owner aren’t depending on governmental assistance where as most commercial operations have adequate coverage or self funded emergency funds to offset losses. I would be interested in hearing more as that has not been what I have read or experienced.

 

[Winchester]

Ending the mortgage interest reduction is a way of making the middle class pay for the tax cuts for the wealthy. It has been a GOP dream for decades. It is already capped at a $500,000 loan for individuals.

https://www.cnbc.com/2016/12/01/heads-up-homeowners-mortgage-interest-deduction-on-trumps-chopping-block.html

Did you even read the article?

The deduction is very popular, but it benefits far fewer taxpayers than one might think. The current homeownership rate is around 62 percent, but of those homeowners, one-third do not have a mortgage. They own their homes outright, so the deduction would not apply to them.

Some homeowners, mainly middle- and lower-income families either don't pay federal income taxes or don't itemize, so the deduction wouldn't apply to them either. Only about 40 million (or 22.5 percent) of the 173 million households in the U.S. benefit from the mortgage interest deduction, according to the Tax Policy Center.

 

[iguanaman]

Did you even read the article?

So 40 million X $10,000 = a huge windfall taken from the middle class that can be used to lower taxes on the rich.

 

[Winchester]

So 40 million X $10,000 = a huge windfall taken from the middle class that can be used to lower taxes on the rich.

That was an extreme example, not reality. 40 million people do not have a $500,000 mortgage at 4.5%, are in a 33% marginal bracket and have enough other deductions to itemize before taking the mortgage deduction into consideration. Those that have those kind of numbers aren't going to fall into the middle class either.

The one's that take in the shorts the worse are going to be in the $200k+ income and then at an average of $4,149 for those who have mortgages.

 

[Critter7r]

Both.

The third factor is that people look at home ownership as an investment rather than throwing money down the rent rat hole. Mostly they're correct, but like any investment it doesn't always work out as planned.

Based on nothing but my own anecdotes, I suspect that people spend WAY more time and money on a home they own than they could ever possibly recoup by selling it. Think about how much time & money is spent on mowing grass, annual landscaping, painting, interior maintenance, new appliances, etc. Renters generally don't have to tackle that stuff themselves, and that's why renting generally has a higher monthly.

 

[Critter7r]

Ah, so it's political for you. I figured you had an agenda. Explains why you argued against obvious logic.

Everyone buying a house calculates in their tax deduction. It's significant, if they itemize.

poor people don't itemize.