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Will the Home Mortgage Interest Deduction Vanish in 2013?

In 2013, Congress is expected to explore a number of tax reforms in order to address staggering deficits and a crippling $17 trillion in debt owed by the Federal government.

No proposed tax reform will be more controversial this year than attempts to alter the Home Mortgage Interest Deduction (HMID).

Considered the holy grail of tax deductions, the annual tax break to homeowners, which provides more than $100 billion a year in tax relief, could see significant changes, thus affecting the finances of millions of Americans.

But in order to understand how these changes could affect you, one needs to understand how this tax break became so monstrous in the first place, and what the impact of such proposals could have on the housing markets.

In fact, this very issue proves why even grander tax reform is necessary right now in the United States.

Is it Your Money or the Government's?

Tax breaks – known as tax loopholes by those who enjoy spending taxes instead of paying them – are public policies that provide discounts on your taxes and encourage economic activity that the government deems beneficial to the Americans and the economy.

According to the Congressional Budget Office, tax breaks "cost the government" $1.2 trillion annually, with roughly 75% going to the top 20% of wage earners.

Such activities include starting a business, buying a home, going to college, or having a child (after all, productive members of society become productive taxpayers in the end).

However, the problem is that any activity can be considered beneficial to the economy if one wanted to stretch their imaginations. For example, joining a gym is technically a beneficial activity because health and wellness decreases your strain on healthcare services and prolongs your economic activity to the country.

And proposals have been put forward that gym memberships should be tax deductible, and, in some cases for specific employment classes, actually are.

For these reasons, the number and size of tax breaks has dramatically increased over the years. Critics argue that the federal government forfeits money that would have otherwise been collected as revenue, and that these breaks are little more than subsidies that add up over time and favor the wealthiest classes.

Proponents argue these forms of stimulus are necessary in order to drive economic activity and encourage businesses to hire, Americans to buy houses, and students to go to college.

The problem is… both sides are wrong.

The Mother of All Tax Breaks

Under the current structure of the HMID, the U.S. government permits homeowners to deduct up to $1 million each year in mortgage interest, including the purchase of second homes and vacation houses.

And the amount of money deducted is relatively staggering. The Congressional Budget Office projects this specific annual tax break will cost the government more than $1 trillion over a decade.

But more interesting is the stratification of the benefits across various classes in the United States. The HMID mostly benefits households earning $75,000 to $500,000 a year. According to the Tax Policy Center, this range of Americans earns 77 percent of the tax savings from the HMFD.

Despite this overwhelming benefit to higher households (the median household income in the U.S. hovers near $50,000), many Americans do not have the appetite for removing this form of stimulus.

Even though 77 percent of the breaks go to higher income levels, nearly every American homeowner receives some form of benefit.

So, while no one believes the tax break will go away completely, reform is likely.

Considerations include a simple paring back of the income limit. According to the Tax Policy Center, an annual cap of $500,000 (from $1 million) and using a credit system instead of a deduction, the Federal government could raise $213 billion over the next 10 years.

But even tweaking the cap could have a big impact on the housing market in the short-term. Just the mere mention of altering the deduction would send some ripples through the markets. After all, we just saw what Bernanke's thoughts of the paring back of $85 billion a month to the economy did to the stock market.

Lobbyists Prepare to Defend the Deduction

Critics and lobbyists have long argued the U.S. is only now showing signs of emerging from a years-long housing crisis and that changing the deduction would have a serious impact on housing prices.

Jamie Gregory, a lobbyist of the National Association of Realtors, told Politico that curbing the deduction would harm housing prices, primarily in vacation communities.

"We finally have housing and the economy headed in the right direction, and we don't think this is a good time to be messing around with it," he said.

And Gregory is accurate. In a nation full of subsidies, the mortgage deduction, by definition, creates an incentive and thus inflates the housing market by subsidizing homes that people wouldn't be able to afford otherwise.

This is free money from the government to finance the service on loans to purchase houses.

In fact, many financial and tax advisers encourage homebuyers to use that deduction to their advantage when evaluating properties to buy. Having an extra few thousand dollars annually (and in some cases tens of thousands) adds up, and enables some people to purchase homes they wouldn't consider without the subsidy. This creates a distortion down the value chain of the housing industry.

Naturally, eliminating the deduction would have a ripple effect across the economy, but at the same time, it would move the housing markets back toward equilibrium, where it should have been after the crash. The financial incentive of the mortgage deduction would be removed, and Americans would purchase homes without the need for the subsidy.

However, the impact on aggregate home purchases isn't entirely clear following a potential downturn. Congress creates tax breaks in order to stimulate demand, but it is clear that unintended consequences of this deduction have been the artificial increase in the purchase of more expensive homes.

This is just one more tool of Keynesian economics that creates false realities and reliance by taxpayers to encourage more of the same sort of gifts to certain classes and special interest groups.

The reality is that the tax system is so Byzantine and favors the few at the expense of the rest. The reality is that lower tax rates coupled with the elimination of these deductions would provide far more equality and stability to Americans, and reduce the need for this ridiculous argument in the first place.

By lowering tax rates, the government would automatically erase any need for these special interest stimuli. If someone wants to buy a house with the money they save on taxes… they will buy a house.

But in the end, what would all the tax advisers and lawyers do?

Now we know why the spending on lobbying is at an all-time high for both of these industries… and real estate interests doubled their lobbying cash in 2012. It's all about the tax code… and its failures.

In the end, this complex economic issue will be handled by Congress. Given that only 25 percent of our sitting Congressmen and Senators have any form of economics training whatsoever, I'm sure that this matter will be handled with the utmost care and attention it deserves. It's not like Congress was responsible for the last housing bubble…

The housing recovery seems to be for real. Read how you can profit from it.

So what do you think? Has the Home Mortgage Interest Deduction affected your home purchasing strategy in anyway?

Share your thoughts in the comments section below.

Join the conversation. Click here to jump to comments…

  1. Joseph | July 11, 2013

    Wow, we could actually save monies.

    On the other hand, all the industries associated with the housing market could also suffer greatly, i.e.
    – construction
    – furniture
    – services (lawn – pool – housekeeping)
    Indeed, those 20% of the population who have a healthy respect for money could survive quite comfortably renting and storig their uncirculated wealth for the next big thing… in or out of this country.

  2. Arnold Kirschner | July 12, 2013

    That tax deduction did have an effect on our decision to buy a home. It put us into the "affordable" range for the area we wanted to live in.

    We did help local businesses because we bought flooring, furniture, painting, repairs and much more. We can also add to that the banks made money that they invested in other things.

    Here is a 411 that seems to fly over the heads of the "great" thinkers. There are way, way more people in the middle who can buy far more homes than the few on top. You can put a cap to the size of mortgage interest that can be covered by the deduction so it encourages more middle class to buy a home. The money returned to the economy will make up for it. What is funny, maybe not so much, is the fact that in the story only the money not being paid in taxes is recorded and not the money being made, indirectly, by the extra business activity created by the home owners.

    My two cents.

  3. | July 12, 2013

    What a shame….
    The cost of home ownership is much more than a tax savings. The expense to provide a place to live for yourself and your family provides a far reaching benefit to all sorts of others ( plumbers,electricians,carpenters, home goods and various retail stores, utility companies…) and a list so long it is really quite exhausting. Plus the time it takes to manage all of these tasks is born by the homeowner for free.
    Perhaps we should all be granted the same reward of subsidized housing, free housing, free food subsidy(food stamp programs),subsidized health care(Medicaid),access to lower cost prescription drugs…… And when we can't figure it out we just call a government agency ( from our subsidized phone) and get assigned a government case worker to straighten it all out for us (at no fee) …

  4. Mike Cannon | July 12, 2013

    Can we please dispense with the dishonest claim that the interest deduction "costs" the government money. Since when has the corresponding interest income reportable by the lender been treated as tax exempt income to the lender. If the lender is not effectively paying tax on the income due to other tax benefits then that is a different problem to be addressed and has nothing to do with the interest deduction.

  5. RePete | July 12, 2013

    OK, if the mortgage deduction is taken away, then purchasing power is lost by an amount equal to a persons tax bracket. This means less purchasing power and another wave of home price devaluations. The end result will be another round of foreclosure madness, bank failures, Fannie and Freddie bailouts, and well, you get the idea. Too bad the morons running our government don't get it.

  6. Susan | July 13, 2013

    As a realtor, I know that the larger the price of the home, in the millions, the more likely it is to be paid for in cash. It is the middle buyer than needs and uses – and pays back to the Fed in many ways – this deduction. This is perhaps the best way Congress has ever meddled to create something of value.

  7. George | July 13, 2013

    A rule-of-thumb that will always benefit America is to the opposite of anything NAR says and wants. They say now is not a good time to mess with the HMID. Of course, if we were in a declining market again they would say the same thing! Just like they say it is always a good time to buy a house – whether prices are at bubble levels or depressed levels.

    A house should only be owned for shelter. Not an investment. Not a tax break. I would go as far as saying no one should make any money off of owning a house (i.e. cannot be sold above the purchase price), but that is a bit extreme and off topic. Get rid of the HMID entirely so pricing is based on the true value a home provides (mainly shelter).

  8. John m shook | July 14, 2013

    How is taking less from the people is it a gift?

    You are taking the home buyers money it is not the Governments.

  9. Jimmy Taylor | July 16, 2013

    Leave the mortgage deduction alone or get rid of the IRS!

  10. H. Craig Bradley | July 19, 2013


    A house is a huge expense. EXPENSE! Its price fluxuates up and down according to the broader economy and interest rates. All the money you have spent on your house is tied-up (illiquid) for the most part. The days of home equity loans in a rapidly rising market are gone.

  11. Dave | August 4, 2013

    Interest deductions have been with us for a long time. Many were removed for individual taxpayers during the Reagan years. Look at a list of the things a business can deduct interest on and compare that to the shrinking list of interest deductions left for taxpayers. It has nothing to do with encouraging home ownership. Merely a reflection of a significant expense for homeowners that reduces their available income.
    The effect of removing it will show up in interest rates, not home prices. It is hard to fathom now because rates are artificially low. The interest tax deduction allows lenders to charge a higher rate for a secured loan than the market would bear. Pre-housing crash, the default rate on mortgages was below 1%. The principal recovery rate was much lower. So in a normal environment, mortgage loans (80/20 conventional) are gravy for the lenders (interest rate risk aside). The tax deduction has the same affect on mortgage rates that it has on municipal bond rates (in reverse).

  12. Dax | August 8, 2013

    Taxes should be for one purpose, to pay for government services instead, Congress has turned it into a tool for social engineering.

    • Mark | August 17, 2013

      Taxes should be for Government services ONLY. Instead the Government can't help itself & spends "taxes" like water and always, always wants more & more. Until the Government can get even the slightest control over it's reckless spending (which is unlikely), more taxes will only subsidize more Government!

  13. Guest | September 3, 2013

    I am weary of articles that note that taxpayers receive a benefit from lowering taxes, as if that's somehow unfair.

    People who make big money pay big income taxes. If taxes are lowered (or deductions are maintained) they receive big reductions. what could possibly be more fair??

    These same people purchase big houses, pay big property taxes, and pay big interest and insurance charges, too. These big taxpayers/big purchasers also pay for big government and big retail. You would think these people would be heroes! Although they contribute much, much more than their per capita share of tax revenue and economic activity, the 'social justice' crowd sees them as bad guys. Let's be honest. 'Social justice' just means "We want even more of your stuff, and we want the government to take it be force (taxes)."

    Flat tax, or VAT tax, or per capita tax.

  14. robert | September 6, 2013

    The mortgage tax deduction primarily affects the rich and the imprudent.
    The rich because it makes buying houses they can afford cheaper, and the imprudent because it encourages them to buy houses they can't otherwise afford and shouldn't buy.
    As a homeowner for more than 50 years and and a mortgage payer for 30 years I have never once found the mortgage deduction to be of any benefit.

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