New Tax Changes Target the Mortgage Interest Deduction

AMA7-10-13It’s that time again, as officials on both sides of the political fence tackle revisions to the tax code with an eye to reclaiming lost revenue and capping or eliminating various deductions and credits. This time around they’re eyeing the venerable mortgage interest deduction, a prized benefit that heads the list of deductions related to property ownership. While it’s not clear at this point whether the deduction will be eliminated, income property investors and homeowners can expect some changes.

The mortgage interest deduction has been a part of the tax code since 1913. As the law stands now, property owners, both residential and investors, can deduct up to $1 million of the interest paid on their mortgages, plus up to $100,000 in interest on home equity loans. That applies to a primary residence as well as to second homes, and to investment properties as well. Proponents of the deduction say that it helps to support home ownership by helping homeowners offset costs of a mortgage and encouraging people to take out mortgages.

But Congressional leaders and policy analysts say that the deduction actually costs billions annually in lost tax revenues. What’s more, the number of homeowners who benefit from it is actually relatively small. According to a new report by CNBC, representatives of the Center on Badger and Policy Priorities say that only about 20 percent of eligible homeowners actually claim the deduction every year.

Not only that, the mortgage interest deduction doesn’t benefit the mortgage holders who need it most The CBPP’s latest study revealed that over two thirds of the deduction’s benefits went to taxpayers with incomes in the $100,000 bracket and above. Those reporting incomes lower than that got little or no actual benefit from the deduction.

A number of new proposals have been floated from both sides of the government on how to revise but not eliminate the deduction so that it can benefit more homeowners. Solutions include capping the credit at half its current value and extending a simple tax credit that would eliminate the need for itemizing the return. Another proposed solution could eliminate the deduction for second or nonresidential properties.

But real estate and mortgage professionals argue that the deduction option means more to prospective property owners than a credit, and it leads the list of tax benefits for homeowners. That helps boost mortgage applications and homeownership. And that in turn boosts the housing recovery and creates a better environment for property transactions in general.

In any case, change is coming – as early as 2013, according to some lawmakers. Even if the mortgage interest deduction isn’t eliminated entirely it will certainly be changed. A tax credit system may reduce the potential benefit even more. While the proposed changes may not affect most investors who follow Jason Hartman’s investing principles, they could have an impact on the blousing market as a whole – and change the landscape of real estate tax benefits for good.  (Top image:Flickr/ChristinaFisher)

Kohn, Marc. “How the Mortgage Interest Deduction Could Change.” CNBC Finance. CNBC.com. 10 July 2013

The American Monetary Association is your source for updates on monetary policy and personal finance. Read more from our archives:

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The American Monetary Association Team

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