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Will the mortgage interest deduction be cut to avoid the fiscal cliff?

As the fiscal cliff negotiations tighten, the mortgage interest deduction is being debated – will it stay, or will it go in an effort to slash the federal budget?

College Debt and Housing

mortgage interest deduction

Americans prefer the mortgage interest deduction to charity

Americans would be more willing to give up the tax deduction for charitable giving than some other popular tax breaks, including the one for the interest on their home mortgages, a new Christian Science Monitor/TIPP survey reports, with details arriving as President Obama and congressional lawmakers bargain over ways to reduce future federal deficits, while avoiding a “fiscal cliff” of scheduled tax hikes that could have a massively negative impact on the economy.

The new survey results back up the National Association of Realtors’ (NAR’s) claims that consumers want to preserve the mortgage interest deductions, calling it “one of the middle class’s key incentives for wealth-building,” meanwhile the trade group acknowledges that there is a divide between homeowners and economists alongside politicians who believe the mortgage interest deduction should be cut as part of a shrunken federal budget.

NAR addressed this divide by highlighting The Diane Rehm Show on NPR which showcased various economists to examine the mortgage interest deduction in context of the fiscal cliff debate. Some economists asserted an overall cap should be implemented on itemized deductions, another said the mortgage interest deduction should be transitioned over a ten year period to a flat credit, while NAR Chief Economist Dr. Lawrence Yun said that eliminating the mortgage interest deduction “could greatly destabilize the economy.”

“Some economists argue that the mortgage interest deduction is holding back economic growth,” Dr. Yun said, adding, “I would argue the other way, that homeownership provides incentive for people to work hard when thinking the long-term vision.”

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But didn’t eliminating the MID in England work?

During the radio show, England was used as an example supporting the elimination of the mortgage interest deduction, as the nation phased out their version of the deduction over several years, with little impact on home values.

Dr. Yun said that the comparison is misleading, because England had an acute shortage of market housing and values would have gone up no matter what simply on the basis of supply and demand. “Housing start activity in England was much lower in proportionately compared to the U.S.,” Yun said. It “was just a supply restriction that occurred in England.”

You can’t just look at one side of the ledger

One man that called into the show said, that phasing out mortgage interest deductions just looks at one side of the debate budget and misses the impact it will have on the middle class. “You’re doing everything right, saving for college, paying life insurance, etc., you start phasing out your tax benefits,” he said. “You’re absolutely killing the middle class… You can’t—it just—you can’t look at one side of the ledger.”

On Fox Business today, Dr. Jed Kolko, Chief Economist at Trulia summarized the potential destiny of the mortgage interest deduction as all options are on the table during fiscal cliff negotiations. Dr. Kolko notes that elimination of the mortgage interest deduction would actually be most harmful to homeowners in the earlier years of their mortgage.

Two economists from the National Association of Realtors address in the following video the full historical context regarding the mortgage interest deductions, and how we got to this point as a nation:

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Tara Steele is the News Director at The American Genius, covering entrepreneur, real estate, technology news and everything in between. If you'd like to reach Tara with a question, comment, press release or hot news tip, simply click the link below.

4 Comments

4 Comments

  1. Derec Shuler

    December 11, 2012 at 6:32 pm

    This definitely hits the middle class the administration has vowed to protect. Many people can’t afford their homes without the MID and the government should not be changing the rules for people with existing mortgages.

  2. Susan Rogers

    December 11, 2012 at 7:12 pm

    If the standard deduction is raised to $15,000 which was another part of the Bowles Simpson plan, then most of the middle class would not be able to take the mortgage interest deduction anyway, so it’s more hype than reality. If the standard deduction is not raised, then yes, we need to keep mortgage interest.

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