Mortgage interest deduction

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    I’d like to get some thoughts. Hopefully, this won’t devolve into a red vs blue match.

    How do folks feel about the mortgage interest deduction? It’s one of the largest deductions in the tax code. To the extent a taxpayer pays mortgage interest, she can deduct the interest portion in determining her taxable income. Presumably, this encourages home ownership. So the benefit of home ownership exceeds the “cost” of the foregone tax revenues.

    But nothing in life is free.

    Let’s say you have a country with 10 families. 5 own a home with a mortgage and 5 rent a home. The government needs to raise $10,000 per year to pay for services. Let’s also assume each family has the exact same pretax income and number of kiddos. Let’s also assume that each of the 10 houses are identical in value. Also assume that each of the 10 families receives the same government services with respect to roads, schools, parks, police, etc.

    Option A: Mortgage interest deduction. Each family with a mortgage pays tax of $900 and each family that rents pays tax of $1,100. Total tax revenue raised is $10,000.

    Option B: No mortgage interest deduction. Each family with a mortgage pays tax of $1,000 and each family that rents pays tax of $1,000. Total tax revenue raised is $10,000.

    Currently, our income tax system uses option A. Any politician who proposes to end the mortgage interest deduction? Just imagine the TV ads from the opponent. Yet presented with the simple scenario above, can anyone argue that Option A is more “fair” than option B? I’d like to get feedback.



    here we go again with that fair stuff…

    in the interest of fairness, i would like to see a cap on mortgage interest deductions

    but for entry level homeowners, the interest rate deduction is the gateway that qualifies them for other deductions.. such as charitable giving.. and those add up to far more than your $100 example.

    ending that deduction would literally put home ownership out of reach for most entry level buyers.

    and raise their effective taxes since those entry level homes would become rentals whose rates generally include the cost of all taxes paid by the owner…

    owners who would, by the way, be able to deduct the cost of their mortgage interest as a business expense.

    now does that seem fair to you?



    JoB brings up a valid point about the interest deduction being the gateway to taking itemized deductions in the first place instead of the standard deduction. Lets also assume that none of the 10 families gave even $1 to charity for purposes of this discussion.



    Ending the mortgage deduction would not be the end of the world, even though I’ve benefitted from it for most of the last 25 years. If it were done away with, though, I would appreciate offsetting “adjustments” (in other words reductions) to my overall tax rate. Also imagine how much homebuilders, mortgage lenders, and related businesses would howl. The only way you could do away with the mortgage deduction, in my opinion, would be as part of overall tax reform — and you can imagine how easy it would be to reach consensus on that (probably harder even than health care reform).

    Also, the truth is a bit more complex than your scenario. This excerpt from The Economist magazine explains why:

    If you combine tax expenditures and entitlements, America’s efforts at redistribution look even more perverse. The government lavishes more dollars overall on the top fifth of the income distribution than the bottom fifth. As Irwin Garfinkel, Lee Rainwater and Timothy Smeeding point out in “Wealth and Welfare States”, a book comparing America’s safety net with those of other countries, the federal government “spends” four times as much on subsidising housing for the richest 20% of Americans (via the mortgage-interest deduction) than it spends on public housing for the poorest fifth.

    For the full article, see




    ” Lets also assume that none of the 10 families gave even $1 to charity for purposes of this discussion. “

    nope. in real life people get to deduct their charitable expenses and medical expenses and who knows what else because their mortgage deduction exceeds the standard deduction..

    it makes a huge difference in real life.

    and skeeter.. that’s where most of us live.



    Again, the mortgage interest deduction is not fair. Why should you get a tax benefit for buying a home? (For the record, as a homeowner I have taken advantage of this deduction for the last 9 years.)

    In my opinion the only deduction that could be potentially fair is one that applies evenly to everyone. No one should be forced to pay taxes on anything they make below the poverty line. No one. Every other bit of income should be taxed at the same rate. No other deductions what-so-ever. Yeah…pretty much a flat tax.

    That’s fair.



    JoB I’m talking about a hypothetical scenario. I’m not talking about real life. Okay, people give money to charity. Let’s assume that charitable and medical expenses are not deductible. I’m trying to isolate how people feel about the mortgage interest deduction.



    rw you make a good point. The wealthy benefit a great deal more from the deduction (assuming they have a mortgage.) If you are in the top tax rate, the government (other taxpayers) pay 35% of your mortgage. If you are in a more moderate income level, the government (other taxpayers) pay 10% or 15% of your mortgage.



    I think the deduction is a bad idea. First, you’re overallocating government resources for “Ownership” as opposed to “Use” – the ownership of 1st and 2nd homes, as opposed to renting.

    Second, you’re not really encouraging ownership so much as you’re encouraging taking on DEBT. Debt is what’s tax favorable, not cash payment. Look at govt’s record, how it fared by encouraging indebtness over the last two decades as it directly involved itself in seeking to make debt too easy to get.

    Third, you’re artificially propping up higher prices & loan interest than might be gotten without the tax incentive.

    There aren’t many reputable economists who think the mortgage interest deduction is a very good idea, but politically it would be hard to remove as the real estate lobby is one of the biggest in Washington DC, representing the home improvement industry, loan-makers & financialization, real estate agents, & the construction industry.

    Why don’t we have tax-deductible credit card interest? And, why not have auto loan debt deductions too? If the home mortgage interest deduction is so desirable, why not be more even-handed for the rest of debtors?



    I remember when we used to be able to write off other kinds of interest. I had to look up the year but remember being really mad at Reagan about it because I was trying to save for a down payment on a house here in West Seattle and those revisions made it just a little harder.

    “On Oct. 22, 1986, President Ronald Reagan signed into law the Tax Reform Act of 1986. Reagan called the 829-page, 33-pound bill ‘the most

    sweeping overhaul of the tax code in our nation’s history.’

    “The new code gradually phased out all deductions for interest paid on car loans, charge-account purchases, vacations and anything else that

    fell under what the law termed ‘consumer loans.’



    Good points Meg. I’ll throw you a little extra piece of information. Canada does not allow a tax deduction for home mortgage interest. Yet Canada has a higher home ownership percentage than the U.S.

    Our country is overdue for a major/fundamental overhaul of the tax code, and I have to think that the elimination of the mortgage interest deduction is on the list of ways to broaden the tax base.




    why target the only deductions that favor the middle class?

    there’s a whole raft of esoteric tax deductions taken by income earners .. as opposed to middle class wage earners… to go after that would generate a whole lot more federal revenue than ending mortgage interest deductions.

    it’s odd that i never hear you asking about them.

    btw.. in the interests of disclosure… i have no horse in this race..

    we rent by choice and thus pay the full extent the law allows on hubby’s wages.



    Ahhh… first, evaluate why the government needs the 10K!

    Home deduction hurts the middle class and low income. JoB.. having just come from the car buying experience… ever notice how sales reps focus on how much can you afford a month.. you worked in car sales,… it’s the bread and butter.

    Mortgage deduction raise home prices. All the traffic will bear. A builder loves the 30 year mortgage. He can add an extra 125K per house… it adds maybe 150 bucks {probably less} keeping it in the “affordable” range. However… Your ownership is mostly interest expense. That feeds the food chain. Anything that is subsidized increase costs,. because you never encounter “real costs”… It is also anti-conservation. See home mortgages and the prevalence of 30 year mortgages…. it means 2500 square foot homes. I don’t care how “green” you are…. or think you are.. if you are an architect designing a 3200 sf home… for a couple and two kids.. you are a resource consuming pig. LEEDS home at 3200 s/f is an oxymoron., Second debt means you never attain a paid asset and defer equity.

    It would be a great boon to low income to eliminate mortgage deductions… housing prices would fall. Affordability. Builder would have to respond. You know in car buying… the longer the fiance terms,,, the less price haggling. Offer cash and you have bargaining power. Deductions for the middle class are for the most part, debt traps. All debt and no equity. You can extend that to student loans,… you all think you are getting favors… you aren’t.

    Deduction of mortgage interest was done for the benefit of the real estate and construction industrry… you are the pigeon. Deduction are ways to shield consumers from true cost.. keep you in perpetual debt. It’s no favor.

    meg you are dead on…. now extend that to student loans and evey other subsidy…. that which is subsisized willl be over used and over priced…



    Last thought.. and the greatest beneficiary? Government .. they get to tax on assessed values. The have an interest in overvalued homes. The 40 per cent drop in home prices? That was more reflective of true value… and how did government prop up the local tax base? Cheap ass 30 year loans the throw inflationary costs back into the equation. Suckers.



    skeeter: that’s a lot of assumptions in your scenario. if life were as rosy in the united states of america as they are in the skeeter states of america, we probably wouldn’t need that deduction.

    in the u.s it’s more like this:

    one family owns 5 homes, some of which are rented to the renters.

    one family owns one home and has one kid.

    one family owns one home and has four kids.

    one family owns one home and has no kids. (or has a single parent.)

    five families rent homes. two or three of these are single parents.

    one family has no home.

    they all pay different tax rates.

    and that’s the point of our tax code. not all money, income, or wealth is created equally. and we have a broad spectrum of incomes and a low GINI index – which might be the understatement of the century.

    cap the mortgage interest deduction at a level that benefits the middle class and encourages home ownership, but is not available to people with five homes.




    let me see if i grasp your argument correctly..

    the mortgage interest deduction hurts middle class buyers because it makes it possible for them to afford a home…

    hmmmm. epic fail.

    it is true that the mortgage deduction was used by some unscrupulous loan brokers as one of many tactics to encourage homebuyers to purchase a mortgage product they couldn’t ultimately afford…

    that was fraud…

    and that my friend was the real reason for that 40% reduction in prices you mention…

    which of course wasn’t really 40% everywhere…

    but why quibble?



    Redblack, I am generally against the mortgage deduction. It’s a huge benefit to the wealthy. A small benefit to a portion of the middle class. And a raw deal for those who rent – typically the poor and middle class. It encourages people to buy more expensive homes than they can afford. But I’d be okay with your proposal to only allow it for those earning under a certain cap. That way the benefit could go to the lower earning folks who need help the most, instead of sending the benefit to the wealthiest.

    Now you mentioned the united states of skeeter. Well I need all the deductions I can get. The houses in Seattle, Hawaii, and Florida are underwater. I’m unable to refinance my yacht because credit markets are tight. And now, gosh darn it, the U.S. has discovered my account in Switzerland and wants to talk. It’s been a rough couple years :-)



    i didn’t mean offense. it was kind of funny how marxist and egalitarian your scenario looked, though. didn’t much resemble america, in my opinion.

    i have to take issue, though, with your assumption that people overextend themselves simply so they can get a bigger deduction on home ownership.

    sometimes people are sold more than they can afford because a realtor or a banker are going to make more profit.

    sometimes they just want more than they can afford out of envy, or out of a belief that they can climb the ladder faster than reality will allow.

    it’s human nature.



    No worries Redblack. In my attempt to isolate one issue, the mortgage interest deduction, I put too many assumptions into the scenario.

    Agreed on the human nature part.



    No JoB… deductions raise prices of homes. You are deducting some of the expense of the debt. You don’t understand affordability. In 7 years… who has more wealth… a 15 year mortgage or a 30 year mortgage holder? It’s that simple.

    Second, government benefits greatly, they too are a winner. The more inflated house prices are… the more local property taxes you pay, which are not deductible.

    Redblack… uh.. you don’t get mortgage deductions on five homes… just two. The other three are non deductible. I took a mortgage deduction on my boat… as a secondary residence. That was made available when Jimmy Carter levied a luxury tax on boats… remember that? Half the boat manufacturing businesses collapsed putting hundreds of thousands of folks out of work. So to get us to buy boats, if you had a kitchen, bath, and sleeping berths… you got a second home mortgage. The list of venerable boat manufacturers that went out of business in WA alone was large indeed. Good union jobs…too! Cabinet makers, shipfitters, pipefitters, material suppliers. Boy he sure stuck it to the top 1 per cent!

    JoB… inventing 30 year debt is not a favor. It just gives you debt. I know Democrats can’t fathom the concept that debt is not a good thing… it’s how they run the world.. borrow, borrow, borrow… jeesh.. maybe they could have put that extra 15 years of debt service to…. college educations? Catastrophic health insurance? That’s why this recession hurt so deeply.. there was no equity … just debt.

    what’s this “they were sold more home than they could afford”.. no they bought more home than they could afford. If you are too flippin stupid to understand what you are buying.. you shouldn’t be buying. Why is too much debt load someone elses fault? If you can’t carry it.. don’t pick it up. You can’ shield people from bad decisions that they want to make.. eh?




    “No JoB… deductions raise prices of homes.”

    no kootch.

    demand raises the price of houses.

    but you are right, you do get to deduct some of the expense… of carrying a mortgage

    as for not deducting the mortgage expense on four or five homes…

    that does depend on whether you carry any of those homes as a business expense, doesn’t it?

    because if you do.. you do deduct the cost of that mortgage as an expense.

    “Second, government benefits greatly, they too are a winner. The more inflated house prices are… the more local property taxes you pay, which are not deductible.”

    No kootch..

    last time we filed long form because we had a mortgage I am thinking we deducted our property taxes .. on the house and on the car.

    We were in Minnesota where we paid property tax on our cars as part of our registration.

    “JoB… inventing 30 year debt is not a favor. It just gives you debt.”

    No kootch..

    In the first place no-one thinks that 30 years of debt is any kind of favor..

    especially not those who pay their mortgages whether their homes are “under water” or not.

    but paying a mortgage does buy you more than just debt.

    it buys you security. As long as you pay your mortgage you can’t be easily evicted from your home.

    it buys you the ability to customize the property you live in without asking permission from your landlord.

    it buys you stability … a stable school system for your children and a stable community for your family.

    it buys you respect when dealing with anyone in the financial community.

    it buys you better rates when you need to borrow.

    it buys you an asset that is possible to borrow against if you need to do so.

    it buys you a plot of earth to call your own.. and to garden as your own..

    that’s the short list…

    it also buys you maintenance costs and taxes and obligations and ….

    “what’s this “they were sold more home than they could afford”..”

    did i say this? I don’t remember it and i am not going to go look.

    I know i did say that a mortgage deduction was used by some salespeople to sell more mortgage than could be afforded.

    Those same sales people used escalating “variable interest” loans to do the same thing… often when a flat rate interest loan could have been afforded.

    This notion that if you can cheat someone they deserve to be cheated has been carried way too far and used by far too many as an excuse to commit fraudulent acts.

    I would remind you that individual mortgage holders didn’t bundle their “bad” paper and sell it to our pension funds… the fellas that created the “bad” paper did that.



    Just to clarify, property taxes on your home are tax deductible, just like the mortgage interest.



    My Gott!

    “no kootch.

    demand raises the price of houses.

    And what happens when you lower credit rates? Demand improves. Your man just gave us 5 trillion in deficits and printed 8 trillion in Obamabucks.. to do what? Stimulate demand.

    So his whole economic “theory” was a bust then? Want some proof…. every economist said it… we had no national savings rate, we had no personal capital .. we were in DEBT… and as we are getting put on a forced debt shedding load.. prices have NOT come down in basic commodities because the dollar value is sinking .. inflation does that.

    Subsidy increases prices… subsidy increases prices… it’s a rock solid bet. That’s why you even have 30 year mortgages. Remember the 25 year Japanese real estate crash? The ringing bell was…. 50 year mortgages. Skeeter… AMT.

    Your pension fund managers didn’t do due diligence. Admittedly… but the “bad paper” mixed with good paper is the rock upon which the CRA was built.

    How many people COULD borrow against their home? 60 per cent of homes were overvalued and they were all debt no equity. You know who is buying all that “bad” paper now? Your US Treasury is… taking it off the hands of FHA and putting it in your SS fund… very comforting. That was part of QE3… if it was bad then it is bad now.




    “And what happens when you lower credit rates? Demand improves.”

    the ability to purchase improves, that’s for sure.

    but without the ability to finance and repay those mortgages,

    lowering the interest rate alone does not stimulate demand…

    what stimulates demand is income.

    “Your pension fund managers didn’t do due diligence. Admittedly… but the “bad paper” mixed with good paper is the rock upon which the CRA was built.”

    again.. if the sucker will buy it.. it’s their fault.

    what about the fellas who packaged and rated those mortgages as secure investments?

    where exactly do you see their role in all of this kootch? You seem to have a total inability to hold those who actually committed fraudulent acts accountable.

    Why is that?



    Because I don’t expect the world to be my babysitter? We did hold Franklin Raines accountable.. I don’t know why Obama hasn’t pursued a fraud case. I suspect the Wall Street watchman in the DoJ.. lowering interest rates JoB .. like selling cars… all they are looking for is your ability to make payments. Same car, same price, a 7 year loan may get you in the car, a 3 year loan might not. So, you pay more for the car in the long run. That stimulates demand because if 7 year loans were not available… no loan, no sale, no demand.

    Now, get in a car wreck. Say, after a year of ownership… your now “used car” is paid off at book value. Ooops.. you still owe money. That’s what happened. A speculative housing bubble burst… and millions were underwater. Luckily, though your credit is trashed.. your loan was secured by real property… if you default. On a consumer loan, you still owe.

    Proof? 300K home at 15 years vs 30 years at 7% ….. the difference in monthly payments, abillity to service the debt is what counts. There are more buyers eligible to buy with 30 year mortgages than 15 year mortgages, That’s why they have them… to stimulate home ownership.

    Good heavens the worlds largest holder of home mortgages didn’t bother to audit the value of the portfolios and bundles they were purchasing? Of course not.. they didn’t have to. They had the full faith and credit of a taxling and borrowing government to backstop them. If Wall Street had no place to sell their bundled products… they wouldn’t have created them. But they sure found willing customers didn’t they.

    If you don’t understand what you are buying and you hold trillions of those products… shame on you. It’s not like they were selling MBS to individual retail consumers. They were selling to very very very big boys and national banks. No audits of bundles? Two parties to the collusion. Congress didn’t want to know what they were buying.

    Mortgages deductions simply put, are subsidies to make debt “affordable” and switch some of the debt burden to the taxpayers.

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