The outrageous flaws of repealing the mortgage interest deduction

Aerial view of a Pennsylvania neighborhood, original photo by daveynin.

100 year old tax deduction in danger

Every few months it seems as though the Mortgage Interest Deduction makes headlines as those readers of AG, and us in the real estate industry surely know.  With the budget crisis that was narrowly resolved in DC at the start of this month, again MID appears to be making another comeback.  NAR, the NAHB, who also has a site dedicated to protecting MID, called Save My MID, and other pro-homeowner groups will be lobbying for no changes to this sacred cow, this housing subsidy, that some call MID, which has been around for nearly 100 years.  Other groups will be advocating for lowering the max amount that MID can be applied to, nixing second homes, or perhaps, eliminating it altogether.

Most of us, as Realtors, do not moonlight as accountants, nor do we make a habit of studying tax policy. And some of us, (me) are really pretty bad at the whole numbers thing, anyway. It becomes extremely helpful when others are able to put figures into tables or charts. The Reason Foundation released a four page summary this month on why MID should be completely bounced from the tax code. While they are advocating for the repeal of the mortgage interest deduction, their summary is still very good. 

The New York Times recently published an article regarding MID too, showing a breakdown of who claims this deduction, as well as how people do support it, while saying it primarily benefits the wealthy, and younger homeowners. Both are informative, even if one is rallying against MID, as they use hard numbers from the IRS backing up their information.

Reacting to studies on the Mortgage Interest Deduction

A couple of their conclusions are complete Duh Moments, however. They say that younger and wealthier owners benefit the most.  Obviously younger owners are going to have more interest to deduct over a longer time than someone who has nearly paid off their mortgage, and owes mostly principal. Duh. 

What both articles classify as wealthy, is actually an irritating Duh Moment. Apparently filers who earn $75,000 or more are year are now “wealthy.” Uh, really? Me, and just about everyone I know are now rich? I had no idea! I could have sworn most of us live in middle-class houses, drive middle-class vehicles, and save up for middle-class vacations. 

Silly writers, why do you think we take advantage of the MID? If we’re are not out making major business related purchases every year, or do not have dependants, what other deductions do we have? *cough*  MID and property taxes. Imagine that, both are related to homeownership.

Looking beyond income brackets

Instead of looking at just income brackets, and who itemizes, as the articles above point out, have we ever thought about who may claim MID? Instead of wondering, I asked a longtime friend, who happens to be an accountant who said that wealthy tax filiers are going to have many more deductions overall, and probably benefit the most, true. But how our tax code is written, it allows pretty much everyone to claim the MID, if they are a homeowner. It does phase out part of the AMT, but most are entitled to claim it, no matter how they file, it just goes in different places on tax forms.

This is absolutely a simplified version of what Brett Thomas, my awesome accountant friend, shared, but it really puts into perspective that everyone who owns a home can benefit from the mortgage interest deduction. It is not just the mega rich, or those who are truly itemizing (think Schedule C) their taxes every year.

MID’s role in the rent vs. buy debate

The common claims, that MID allows owners to afford to buy more home than they otherwise could, or that values would decline and purchases to slow if MID were eliminated, may or may not be true.  I’m not smart enough to know that, and I don’t have a crystal ball in my bag of tricks. 

I do know, for a fact that MID was one of the main reasons I chose to buy, and way before my real estate career began. At the time, the price of renting was very similar to a mortgage payment, I’d be able to paint walls, hang pictures, would no longer have to haul my laundry elsewhere to be washed, and other awesome things, all without worrying about losing a security deposit. 

Most importantly, I’d be able to offset some of the marriage penalty I got smacked with and possibly not end up owing so darn much every year. Hey, it was buy a house or get a divorce, and lawyers are expensive, on a, ahem, middle-class income.