Not quite so keen on that mortgage-interest deduction
As someone who’s been thinking of buying a house for a while now and for whom a Bay Area mortgage would stretch the budget rather thin, I’ve been very interested in the mortgage-interest tax deduction. For anyone out there who isn’t a homeowner or prospective homeowner, that’s a part of the tax code that allows you to deduct interest on mortgages, which for the first few years of a mortgage is usually a significant portion of the payments.
Today’s New York Times Magazine has a fascinating article about how the mortgage-interest deduction isn’t all it’s cracked up to be. Specifically, it overwhelmingly helps the rich, and it doesn’t seem to boost homeownership at all. Given that, I’m suddenly a lot less enamored with it than I was an hour ago. In fact, I’m inclined to agree with the tax reform panel that unanimously decided that the mortgage-interest deduction should be scrapped as part of a plan to simplify the tax code and eliminate the AMT. Sadly, it looks like that plan was dead on arrival in Congress.
p Said,
March 5, 2006 @ 7:25 pm
Well from someone who looks forward to tax returns each year, and to whom 5000 or so is a big deal, I’d like to tell you that everything is relative and if this is gone, I’ll be very upset.
Again, everything is relative, you have bay area goggles on.
Anonymous Said,
March 6, 2006 @ 3:47 pm
I see what they’re getting at. Still, doing my taxes, I see that 2 years ago, I was able to chop $10,000 off of my taxable income thanks to my mortgage-interest deduction. Last year was less because I sold the house half-way through the year. Even though my salary has increased significantly since then, I could still use a $10,000 reduction in taxable income.
Scott Ellsworth Said,
March 6, 2006 @ 8:07 pm
Hey, Eric.
Take a very close look at the numbers. They assumed the median home price of 140k, while the houses near me all sell for $700k+, and this is not a ritzy neighborhood. I understand silicon valley prices are, in fact, worse. Given these insane prices, lots of people even finance more than 80%. (We did, when we bought our first house.)
Also, they only noted the writeoff for the federal taxes, and that at 25%. 28% is more likely, and an additional 9% for California, thus 37% is probably a good number.
Finally, you get to write off property taxes as well. While this is not as big a deduction as interest, when you pay $7500+ a year in property taxes, it can be a noticeable deduction.
The numbers probably do work out in favor of home ownership at the moment, if you can afford it and are spending anything close to that on rent.
Had the deduction been cancelled, I would have feared a double whammy on home prices. The deduction itself would have caused some downward pressure, but I suspect a bigger effect will come from interest rate changes. An amazing number of people living near me in those $750k homes financed them with adjustable rate interest only loans, and they are going to be very shocked when the rates jump up from 3-4%.
This, along with the increased property taxes on a new purchase, is one reason why we have not tried to ‘move up’ to a bigger house. Jenny and I agreed that we would never buy a house that was out of our range with only one income, and with Carter-era rates. (In other words, fixed rate only need apply.)
They do have a point - we have to decide just what we want to incentivize, but there are lots of ways to get good results that will not have quite the same effect. For example, capping the deduction at half again the median home price would regularize home prices across the country.
Scott
Andrew Said,
March 10, 2006 @ 2:12 am
Entitlements never go away in a populist democracy.