Saying Bye-Bye to the Mortgage Interest Deduction?

by Darwin on October 27, 2010

How would you feel if the mortgage interest deduction on homes were eliminated tomorrow?  If you’re a renter, you probably wouldn’t care.  But if you’re a homeowner, especially one with a sizable mortgage payment, that might give you pause, right?  I couldn’t help but notice in this recent article that the “Deficit Commission” is considering eliminating this once untouchable perk for homeowners.  Aside from banking and real estate lobbies, I think American homeowners would be pretty upset over this measure, and rightfully so.

Changing the Rules on Those Playing By the Rules

See, the thing that’s so frustrating about the current environment is that the rules keep changing.  I feel wholeheartedly that this is the #1 reason the economy is faltering.  Businesses and consumers alike know one thing and one thing only – that the rules are going to change yet again.  After bailouts, credits and stimulus packages, we have more coming (Another $1 Trillion in QE2 likely on the way next week).  Recently, we’ve seen crutches for those who behaved irresponsibly and benefits conferred to those who didn’t.  So, once again, what we’d have here is a bunch of people like me who bought a home under one set of rules only to find that the rules changed later.  Losing the mortgage interest deduction would cost our family a few thousand dollars per year.  This is a tax to us (loss of a previously agreed and understood tax deduction).  But I guess by mincing words, Obama could claim he stood by his promise of “not raising taxes on the middle class” even though the middle class would likely suffer the most.  The rich would be impacted to a lesser degree, the poor tend to not have substantial real estate holdings and the middle would be left holding the bag.

Practically speaking, many people may not be impacted that much by the deduction since they already have the standard deduction or they may be further along into a mortgage when the amortization structure has most of the payment going toward principal.  However, for people buying a home in the past few years, it’s a hike in federal taxes to the tune of thousands of dollars, no doubt about it.

Here’s the Worst Part

Now, there are arguments that this is actually a pretty “efficient tax”.  Some feel the benefits derived from dumping the deduction wouldn’t adversely impact home prices or pocket books that badly.  Others point to other countries in the developed world that don’t have such a tax break as evidence that it’s not needed here.  But that’s not the point.  I bought my house and planned our personal finances with this assumption in mind – it was tax law for decades.  If your employer cut your pay 10% tomorrow or your state sales tax doubled tomorrow, you’d notice, right?  But no, that’s not the worst part.  The worst part is that this is just another money grab.  As the Fed embarks on another Trillion dollars in “stimulus” next week, they’re looking to recoup the mortgage interest tax deduction on the backs of responsible homeowners that didn’t need mortgage modifications, didn’t do a strategic default, didn’t walk away from their homes – people that played by the rules, only to have them changed.  And these new tax revenues?  They’ll just spend it.  That is the worst part.  It will all be for nothing.  Just another redistribution of wealth.

Personally, I think the backlash from such a measure would be substantial, and I hope it is.  But in the end, as we saw with healthcare reform, if there’s a will, there’s a way, no matter how many votes there are in Congress or no matter what the country thinks about it.  It will certainly be interesting to see how this plays out.

What Are Your Thoughts on Elimination of the Mortgage Interest Tax Deduction?

(mention in your reply if you’re a renter or owner)

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