Mortgage Interest Deduction In The Sights Of Deficit Reduction

 

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President Obama creating the National Commission On Fiscal Responsibility and Reform

The National Commission on Fiscal Responsibility and Reform released a draft proposal today of their deficit reducition ideas and as I've previously mentioned the mortgage interest deduction is being targeted. If you look at page 26 you will see that one proposal is to eliminate the deduction for second homes, home equity loans, and mortgages over $500,000. What's not clear is do they literally mean if your mortage is over $500,000 you can't deduct any of the interest or just the portion that is attributable to the mortgage over $500,000? And if it's the latter how would you calculate that? Could get complicated.

Of course, the mortgage interest deduction is a real sacred cow, supported by some strong special interest groups. However, I have to admit the draft proposal sure sounds reasonable to me. The stuff they are looking to take away should never have been allowed to begin with. In addition, by one report 75% of the deficit reduction would come from spending cuts, it would vastly simplify the tax code, and it would solve the growing alternative minimum tax problem. CNN provided a great summary of the draft proposal. As they point out there is still a lot of work to be done but I love the smell of budget cutting in the morning.

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  • One of the things lost in the whole housing bubble is that many people took HELOCs in order to make up the shortfall between what they could put down (if anything)and the 20% required to avoid PMI, the logic being, might as well get the tax deduction.

    So the point is, please let's be consistent. Either mortgage interest, Home Equity interest and PMI be tax deductable, or none of it.

  • Fair enough. You could allow a HELOC to be deductible if taken out at the time of purchase but not after that.

  • So then a refi to get a lower rate blows away the deduction? Or just people who want to upgrade the kitchen or build a garage?

  • Yeah, good point. In principle you don't want to give a tax deduction to people paying off their vacation to Hawaii. Hell, if I know how to set tax policy.

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