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Silver Super Contributor
Babak
Posts: 1,249
Registered: ‎05-01-2010
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Mortgage Interest Deduction, no political rants please!

My favorite subject again! The last 2-3 times I've brought this up, a majority of posters strongly believed that the Home Mortgage Interest Deduction (HMID) is too sacred to be messed with. What do you guys think now? In my mind, at least some impact is guaranteed already considering the various proposals out there:

 

* Bowles-Simpson:

 

This plan is again coming up in the discussions. Where the HMID is concerned, two options were proposed:

1- Entirely eliminate HMID

2- Limit HMID to $500k mortgages and remove it for second homes and home equity lines.

 

* White House initial offer:

 

The main highlight of this plan is of course letting the tax rates go back up to pre-2001 levels for higher brakcets. However there is also $600B of tax deductions that are eliminated and part of that comes from HMID. One item I remember is that such deductions will be limited at the 28% rate for anyone making over 200/250k. I recall another limit to deductions but don't remember the details now. Anyone want to fill that in?

 

* GOP counterproposal:

 

The GOP proposes cutting tax deductions while also lowering tax rates to raise $800B in new tax revenue but does not detail how this would acheive. An estimate of current tax deductions include:

- employer-sponsored health insurance — $164.2 billion

- employer pension benefits — $162.7 billion

- mortgage interest deduction — $99.8 billion

- medicare benefits — $76.2 billion

- earned income tax credit — $58.4 billion

- state and local income taxes — $54 billion

- gains at death and the gift carryover exclusion — $51.9 billion

- charitable contributions — $51.6 billion

- so-called cafeteria plans — $43.8 billion

 

As you can see, these barely add up to $800B but if tax rates were to actually be cut as the counteroffer suggests, that certainly means eliminating all such deductions.

 

* The Domenici-Rivlin plan:

 

This one is probably too extreme to get any consideration but just for the sake of completeness, I'll mention it as well. Where HMID is concerned, it suggests a 15 percent, nonrefundable credit which is hard to compare with the current model but is also expected to reduce this benefit, specially at higher home prices / incomes levels.

 

 

So once again, let's please keep the topic limited to the HMID and not start political arguments in this one so the thread doesn't get locked.

 

Regular Visitor
manueldiva
Posts: 7
Registered: ‎11-27-2012
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Re: Mortgage Interest Deduction, no political rants please!

I really think it should be a sliding scale. Depending on location, 500k doesn't get you much house if even that. You can start the sliding scale at 500k. ex: up to 500k - 100%. 600k - 90% etc. etc. and limited to primary dwelling. 

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Babak
Posts: 1,249
Registered: ‎05-01-2010
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Re: Mortgage Interest Deduction, no political rants please!


manueldiva wrote:

I really think it should be a sliding scale. Depending on location, 500k doesn't get you much house if even that. You can start the sliding scale at 500k. ex: up to 500k - 100%. 600k - 90% etc. etc. and limited to primary dwelling. 


I agree that maybe it should be that way but it won't be! Federal tax policy has always been uniform nationally and with the proposals out there, this one isn't looking any different.

 

What I wonder now is what kind of hit the high-end real estate market will take when one of these plans passes and by high-end, I mean the whole LA (compared to national).

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jordanmust
Posts: 97
Registered: ‎08-18-2012
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Re: Mortgage Interest Deduction, no political rants please!

I would not be shocked to see the deduction pulled from 2nd homes, and maybe limited to 750k or so on principal residences.

 

I picked 750k just because it's in the middle between the current 1 million and 500k.  No specific reason.

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shisha1999
Posts: 80
Registered: ‎10-08-2010
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Re: Mortgage Interest Deduction, no political rants please!

I purchased my home because my realtor told me I would benefit from the interest deductions and there would be no property tax increases. Looks like nothing is protected anymore.

 

If interest deductions are taken away, what are Realtors going to use now as incentives to pruchase a home?

 

 

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Babak
Posts: 1,249
Registered: ‎05-01-2010
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Re: Mortgage Interest Deduction, no political rants please!


shisha1999 wrote:

I purchased my home because my realtor told me I would benefit from the interest deductions and there would be no property tax increases. Looks like nothing is protected anymore.

 

If interest deductions are taken away, what are Realtors going to use now as incentives to pruchase a home?


If you've paid into Medicare your whole life and are now being told that you may not get benefits the first couple of years as you expected, or you won't get exactly what you signed up, I would think breaking an implicit promise on HMID is less grave.

 

Realtors will tell you whatever helps sell you homes. It may be that home prices will go up 20% per year over the next 10 years or they may take advantage of just how few people understand compound interest and do actual calculations for them showing how much homes have gone up in the past. Whatever it is, it will be fluid and adapt to the circumstances!

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Babak
Posts: 1,249
Registered: ‎05-01-2010
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Re: Mortgage Interest Deduction, no political rants please!


jordanmust wrote:

I would not be shocked to see the deduction pulled from 2nd homes, and maybe limited to 750k or so on principal residences.

 

I picked 750k just because it's in the middle between the current 1 million and 500k.  No specific reason.


The impact may be what you say but I think it will look different on the surface. Right now the Republican proposal most likely involves eliminating all itemized deductions while the one from the White House only takes away a bit of them for incomes up to $200-300k. I would expect the compromise to be in the middle as you say but not to bring up HMID and instead focus on the level of permitted itemized deductions and the rate at which they are deducted, as is the case now under the two initial proposals. The effect would be the same but a bit more complicated to figure out and I wonder how long it will take for it to sink in for the majority of home buyers.

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WheelinDealin
Posts: 562
Registered: ‎01-25-2012

Re: Mortgage Interest Deduction, no political rants please!

[ Edited ]

For arguments sake, if they completely eliminated the Home Mortgage Interest Deduction, do you think people who already bought would be grandfathered in and it would only affect new buyers, or not? Because if not, many current homeowners would not be able to afford their homes.

 

Also, I completely agree that 2nd homes should not get ANY deduction whatsoever. If you are wealthy enough to own two residences you don't need a tax credit.

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digo
Posts: 674
Registered: ‎09-17-2010
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Re: Mortgage Interest Deduction, no political rants please!

I really think they should be careful not to cause another major hit to the housing market just as it is recovering. The housing and construction industry have the potential to be good job creators.

 

One of the best ideas floated is having some sort of upper limit for all deductions (except perhaps charity donations). This seems like the easiest, most easily verifiable, and least disruptive path.

 

If someone has paid down their first home and has a mortgage on their 2nd, why shouldn't they be able to deduct the mortgage they have?

 

I don't think it makes sense to grandfather existing owners at all because any income generated would be too small to make it worth it.

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Jil
Posts: 3,150
Registered: ‎10-24-2011
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Re: Mortgage Interest Deduction, no political rants please!

Current Dedudction: Interest on a mortgage taken out to buy, build or improve your home after October 13, 1987, may be fully deducted only if the total debt from all mortgages, including any grandfathered debt, amounts to $1 million or less for married couples and $500,000 or less for singles or married couples filing separately.

 

http://finance.yahoo.com/blogs/daily-ticker/capping-mortgage-interest-deduction-could-chilling-effec... The links says "The nonpartisan Tax Policy Center (TPC) estimates that capping tax deductions at $50,000 would raise $749 billion over 10 years, which is serious money even for the federal government". If the cap $50k is for mortgage deduction alone, it is fine. If it is for overall deduction including itemized, it is different. I assume cap $50k is for mortgage deduction alone.

 

Assuming high interest rate borrower gets at 5%, the interest on 1Million loan is $50000/year. If it is capped at $50000 (only mortgage deduction) it may not have so much impact. If it is reduced to $500000 instead of current 1M, it impacts higher end, but normally they also end up with AMT.

 

Hence, it is in line within the eligibility. However, when interest rate exceeds 5%, it must have negative impact on high-end homes. Still the impact will be low as normally these high deductions gets into AMT.