Realty Views By Terry Ross

The Home Mortgage Deduction Is DebatedTerry Ross, Realty Views

June 4th, 2013 – With the real estate market stabilized and getting stronger in many areas, the debate regarding the fate of the mortgage interest deduction is starting to heat up again in many corners. The federal government is looking for money under rocks in an attempt to balance the budget, or at least work in that direction, and has floated the idea of phasing out one of the tenants of U.S. housing: the ability to write off mortgage interest against income for tax purposes.

While it is true that other nations such as Canada do not make allowances for housing or other real estate related expenses when it comes to taxes, the significant tax incentive for mortgages available in this country has historically been a key economic driver in America.

The National Association of Home Builders (NAHB) is naturally opposed to any more deterioration of the home mortgage deduction or other tax incentives for builders of homes or rental units. The NAHB made its position clear with some compelling arguments before the House Ways and Means Committee recently, noting that contrary to some reporting a vast number of Americans DO use the deduction and the home building industry creates jobs and economic activity.

“The real estate tax deduction is an important reminder that homeowners pay more than $300 billion in property taxes each year. This fact is often ignored in the federal tax debates because these taxes are collected by state and local governments,” said Robert Dietz, an economist and assistant vice president for NAHB.

There is also a direct correlation between the age of a homeowner and the resulting benefit from the mortgage interest deduction, he added. As a share of household income, the largest deductions are for those 35 and younger. The benefit of a deduction that reduces the net cost of monthly house payments is particularly important to these home buyers, who typically have less equity, tighter household budgets and must meet the needs of a growing family.

“Given this demographic connection, NAHB believes that any policy change that makes it harder to buy a home, or forces young families to defer home purchases, will have a significant impact on wealth accumulation and the makeup of the middle class,” Dietz said.

“We frequently hear that few homeowners benefit from the mortgage interest deduction because itemization is required,” he said. “In fact, most homeowners will claim it. In 2009, 35 million taxpayers, or 70 percent of homeowners with a mortgage, claimed the mortgage deduction in that year. Among all homeowners who have ever held a mortgage, the vast majority have claimed the home mortgage deduction for years at a time.”

On the other side of the coin, Bloomberg News, which caters to Wall Street interests primarily, is campaigning for tax reform (certainly not increasing capital gains taxes) by advocating the phase-out of the home interest deduction and even calling the current system “subsidized borrowing.”

In an editorial that appeared on Bloomberg.com just after the NAHB appeared before Congress, the media outlet’s editorial board advocated “…winding down subsidies in the U.S., we would immediately limit the mortgage-interest deduction to primary residences and lower the mortgage cap to $700,000 from $1 million. Each year, the cap could be lowered by $25,000. At this rate, the subsidy would be gone in 28 years.”

It doesn’t stop there! Bloomberg wants to cut real estate tax deductions even more in the name of helping the middle class: “We would cap the value of the mortgage-interest and property-tax breaks at 28 percent, so that everyone who claims $1 of deductions gets the same 28 cent benefit. This would reduce the subsidy to the highest earners while protecting the middle class. Taxpayers in lower brackets would get a slightly more generous break than they do now. The value of the deduction could be reduced by one percentage point per year, also ending it completely after 28 years.

“These changes would raise taxes on tens of millions of households. Congress could use the extra revenue to trim the deficit, although we wouldn’t recommend that – the economy needs more, not less, stimulus right now. We would prefer offsetting the fiscal drag from the tax increase by giving a refundable tax credit to everyone, including those who don’t currently claim either deduction.”

While admitting that housing contributed $1.25 trillion of consumption into the U.S. economy from 2002 until 2006, the editorial goes on to say that housing construction hasn’t contributed much to the (so-called) recovery. True. With the job market and the banking system in its current state, a housing recovery is going to be slow. With changesn in the tax code and higher taxes it will be even slower – the Bloomberg editorial hints at this but then reverses course, since its mission is to promote stocks and bonds above housing or any competing form of investment.

Real estate and housing will have its hands full going forward trying to fight for its place in the economy with government looking for new sources of revenue and competing interests looking for an advantage in promoting their products for a bigger share of Americans’ money.

(Terry Ross, the broker-owner of TR Properties, will answer any questions about today’s real estate market. E-mail questions to Realty Views at terryross1@cs.com or call  562/498-1049.)