Every few years, some committee floats the idea of eliminating the mortgage interest deduction on primary residences. It came up in again in Washington, D.C., recently, along with the possibility of delaying Social Security payments for many of the bouncing baby boom generation.
My reaction to these proposals in a "normal year" had always been:
- If the mortgage interest deduction must be on the chopping block, why not first start with second homes, weigh the results, then re-evaluate?
- If eliminating the mortgage interest deduction on primary homes is deemed critical, why not reduce the maximum amount first, test and revisit?
Traditional assumptions about the benefits of homeownership have become subject to debate. With a gradual rise in interest rates during the next few years also looking likely, isn’t this a curious time to discuss the chance of taking away a long-standing housing benefit?
"Of course, the Realtors will always oppose," said John Tuccillo, a national housing economist. "That opposition, plus that of the National Association of Home Builders, will probably be enough to sink the idea."
Some accountants have jokingly referred to the concept of deducting interest on two homes as the "Congressman’s Rule" because some of our lawmakers have a residence in the nation’s capital and another in their home state. Accountants said that if the second-home mortgage interest deduction is ever threatened, taxpayers could choose to rent out their homes for a period greater than their personal use and change the second home’s status to an investment property.
"Don’t forget that most members of Congress own two homes," Tuccillo said. "Will they gore their own oxen? And who has the political capital to get something like that through?"
Before 1987, mortgage interest on all residences could be deducted without limit. Since then, consumers with more than two residences are required to choose two "qualified" residences where mortgage interest could be deducted, but the selected residences are allowed to be juggled into the "qualified" category from year to year.
Sheila Crowley, president of the National Low Income Housing Coalition (NLIHC), constantly seeks creative ways to fund basic shelter. For years, she’s targeted incentives for high-cost homes, especially second residences.
"Second homes would have to be classified as a luxury," Crowley said. "I mean, does anybody really need one? So, why not have a surtax on them? Can you imagine how quickly the homebuilders would move to get that notion turned around?"
The mortgage interest deduction is not a dollar-for-dollar tax deduction. It reduces taxable income. What is often proposed is disallowing federal tax deductions for first and second mortgages and replacing those write-offs with a 15 percent credit on some mortgage amounts. (The mortgage interest deduction is a combined $1.1 million on first and second homes.) The 15 percent credit would be only for mortgages up to a certain limit, say $500,000.
In most proposals, not only would interest on home-equity loans no longer be tax-deductible, but deductions for state and local property and income taxes would also go out the window.
"If you redirected the mortgage interest deduction from homes over $300,000, you could end homelessness tomorrow," Crowley said. "How much of a home do people really need and to what extent should the government go to subsidize that home?
It’s usually stated that eliminating mortgage interest would level the playing field for average families. In reality, a homeowner with a $250,000 mortgage with a 5 percent interest rate in the 25 percent tax bracket would probably pay $1,500 to $1,900 more in federal income tax if the mortgage interest deduction were eliminated. That’s because a taxpayer would not itemize other deductions as well and simply take the standard deduction.
The National Association of Realtors, with approximately 1.1 million members, would lobby long and hard if the idea of eliminating mortgage interest gets further down the road. It would be a tough nut for any group to crack.
"But people believe the mortgage interest deduction is their birthright," Crowley said. "It’s an untouchable — just like Social Security. Suggest getting rid of the mortgage interest deduction and you’d better leave the room."
Next week: A look at an alternative to the mortgage interest deduction.