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Could killing mortgage deductions kill residential real estate?

It’s not news that the real estate industry has struggled for the past few years. There are hints at a potential recovery as economic indicators point to our bouncing at the bottom, but could something as simple as killing mortgage deductions wipe out the real estate sector?

While sales and prices struggle along, there are a few things holding the real estate world together, most of them tied directly to politics. Rumors of cutting the mortgage deduction roamed the halls of Congress, the internet and news rooms but wasn’t validated until the deficit reduction plan was released today. The plan includes taking a giant machete to mortgage interest deduction for homeowners.

As with all lame duck Congressional sessions, the following weeks will be spent wearily mulling over issues halfheartedly, including major issues du jour like healthcare and the tax code. Critics and supporters are very vocal on the issue of mortgage interest deductions remaining in tact, and why not? How many tax credits can you count that nearly all middle-income earners can count on? That’s right, pretty much only two- mortgage interest deduction and child tax credits.

When everything looked good economically, most people wouldn’t have batted an eye at doing their part by sacrificing tax credits, but when employment is walking on broken ankles without crutches and the home prices and sales are huffing and puffing like Ralphie May taking a break from a marathon, killing mortgage deductions could be the straw that breaks the real estate camel’s back.

Who wins- the rich or the middle class?

“It’s been in the tax code for almost 100 years and it should stay there. Now is not the time to tamper with this,” said the National Association of Realtors’ managing director, Lucien Salvant.

This isn’t a tax deduction that rewards the rich, it’s currently capped at a million bucks anyhow. One of the considerations right now is moving the cap down to $500k. I will acknowledge that the flip side of the argument is that subsidies promote borrowers taking on more debt, but that’s ludicrous in my opinion and here’s why…

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I’m going to get a check from Uncle Sam this year because I replaced a few appliances. I didn’t go out and buy new Energy Star appliances because there was a check from Uncle Sam involved, I bought them because the old ones were pieces of crap, but hey, thanks for the check, America. This isn’t how it should work.

The bottom line is that it is my belief that killing mortgage interest deductions is a back door tax and you can hire a sexy PR team to gussy it up and call it whatever you want, but at the end of the day, it’s money out of peoples’ pockets that are barely hanging on right now.

Lani is the COO and News Director at The American Genius, has co-authored a book, co-founded BASHH, Austin Digital Jobs, Remote Digital Jobs, and is a seasoned business writer and editorialist with a penchant for the irreverent.

32 Comments

32 Comments

  1. Kim Hannemann

    November 15, 2010 at 5:59 pm

    It’s not exactly “the President’s” plan – it’s a commission’s report. He hasn’t endorsed it as far as I know.

    • Lani Rosales

      November 15, 2010 at 9:02 pm

      You’re right. Good catch, I misspoke 🙂

  2. Todd Carpenter

    November 15, 2010 at 6:14 pm

    Hi Lani,

    While there was an initial draft of the plan released last week, as covered by the New York Times, it needs to be said that an initial draft is not the same thing as the actual plan being released. The report could change many times before the report is actually released. And 14 of the commission’s 18 members must agree on the recommendations before they can be released. We believe it’s unlikely that the sitting congress will involved in the outcome of whatever plan is eventually released.

    NAR is actively engaged on behalf of Realtors® and the nation’s home owners to ensure that the current MID is not changed – the tax deductibility of interest paid on mortgages is both a powerful incentive for home ownership and one of the simplest provisions in the tax code.

  3. Ruthmarie Hicks

    November 15, 2010 at 10:12 pm

    The initial proposal was to keep the top rate of the deduction to 28% and not at the top marginal rate. At least that’s what I could find Although I tend to work with more entry level types….this geographic area is noted for its high income families. Trust me, they have it to burn. This is wealth that the wealthiest of Westchester never dreamed of back in the 70s and 80s. It’s beyond ridiculous and a lot of them earned it was earned on Wall Street while everyone else was losing their shirts. They are still raking it in with both arms with bonuses flying around like crazy – while everyone else is being forced out of the area. It may cost them a bit more than they would like; I’m sure they’ll scream and yell and bewail the injustice of it all – but it won’t stop them from buying whatever they want. Such a proposal would bring in badly needed revenue – but wouldn’t make so much as a dent in wallets of that size.

    Now , to extend that to the general middle class – which came up in the committee proposal – that would definitely kill what is left of the “regular housing market” in my area. It would completely obliterate what’s left of the middle class around here. Property taxes are sky high and several property tax rebates that many of the middle class counted on have been taken away. People count heavily on the mortgage interest deduction. But I rather doubt that this will get the presidential seal of approval. Political suicide for just about anyone.

  4. Coleen DeGroff

    November 16, 2010 at 9:28 am

    Of course killing mortgage interest deductions will decimate residential real estate investment. Fact is, though, that we have a ginormous deficit, which Americans insist they want reduced. Our government is beholden to corporations and the richest members of our society. Doesn’t anyone else find it interesting that those two groups! Who hold most of the money in our country, are the only two groups not asked to give anything up under the Simpson-Bowles deficit reduction plan? If we want to keep tax cuts for the rich in place, if we want Wall Street tycoons to keep their ginormous bonuses (set to increase another 5 percent this year), if we want to ensure that corporations are continually rewarded financially for shipping jobs overseas, if we want to keep funding three endless wars…..somebody has got to pay for these things. And that “somebody” is, and will continue to be, the ever-shrinking middle class.

  5. Sondra Wissner

    November 16, 2010 at 1:47 pm

    It has become difficult enough in Stanislaus County with all the foreclosures and high unemployment. I guess this is another “Fleecing of America” plan. Why buy a house anymore? That is what our buyers are going to say to us. With the write-off being taken away what will the incentive to purchase? When will it end…..

  6. Charlie Elwis

    November 16, 2010 at 3:58 pm

    Eliminating the mortgage interest deduction immediately would, of course, be disasterous. However, we do need to look at whether rewarding people for having incurred debt is in our long-term national interest. I favor a graduated phase out of all debt-based deductions along with a reduction in tax rates. A graduated flat tax may be too much to hope for, but it is a worthwhile goal. Interest from savings should be tax free in order to direct America towards a path towards financial independence.

  7. Sam Ferreri

    November 16, 2010 at 6:58 pm

    The mortgage deduction is a good incentive for buying a house, but by far not the most pressing one. Owning a home has (and always will be) the American Dream. And the settled feeling you get in your own home will never be tied only to how much income tax you save. While I enjoy my own mortgage deduction, I would still own a home without it. Be clear, however, that I support NAR and the initiative to save the deduction!

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