THE MORTGAGE INTEREST DEDUCTION

Friday’s “issue” of the CCH week-day daily tax headline e-newsletter reported “Mortgage Interest Deduction Under Scrutiny by Ways and Means Committee” -

“As part of the ongoing effort by House lawmakers to craft comprehensive tax reform legislation in 2013, the House Ways and Means Committee on April 25 heard testimony from real estate experts on the value of the mortgage interest deduction.”

Several experts testified that the mortgage interest deduction does not substantially affect homeownership - and I agree.

Select Revenue Measures Subcommittee Chairman Pat Tiberi, R-Ohio told the committee that few potential homebuyers consider the tax implications of real estate.  The biggest factors in the decision are price and location.

The item tells us –

“Eric J. Toder, co-director of the Urban-Brookings Tax Policy Center, said the mortgage interest deduction is not very effective at promoting homeownership since in provides no subsidy to nonitemizers and a limited subsidy to those in the 15-percent tax bracket. ‘The subsidy value is largest among upper-middle-income taxpayers, who are the ones most likely to own a home without a subsidy,’ Toder noted. ‘Instead, the main incentive the [deduction] provides is an incentive for those who would own a home without a subsidy to purchase larger or more expensive homes.’”

I support keeping the deduction for acquisition debt mortgage interest on one’s primary personal residence, and the deduction for real estate taxes on the same primary personal residence, not to encourage home ownership, but as a form of “geographical equalization”.

Americans are taxed based on income measured in pure dollars.  But the “value” of one’s level of income differs, sometimes greatly, based on one’s geographical location.  A family living in the northeast (New York, New Jersey, Massachusetts, and Connecticut) or California with an income of $150,000 may be just getting by, while a similar family that resides in “middle America” lives like royalty on $150,000. Many components of the Tax Code are indexed for inflation, but nothing is indexed for geography. 

It costs an awful lot to live in the northeast and California. State and local income and property taxes are the highest in the country. The cost of real estate is also excessively high, and so acquisition debt is higher. As a result one must earn a lot more money to be able to live in these states – and so salaries are arbitrarily increased to reflect the higher cost of living.  Since we pay taxes on “net income” after deductions, allowing an itemized deduction for these items would help to somewhat geographically equalize the tax burden.

Only interest on “acquisition debt” – money borrowed to buy, build or substantially improve a taxpayer’s primary personal residence, and secured by the residence - would be deductible.  I support doing away with the deduction for mortgage interest on a second personal residence or for interest on home equity debt not used to substantially improve one’s primary personal residence.

Interest on home equity borrowing would be allowed on Schedule C, E or F if the money borrowed was used for business or rental purposes, using the current “follow the money” tracking rules.

This would require special new rules and regulations for banks and mortgage companies for issuing home-secured loans.

A “mortgage” loan would only be permitted for “acquisition debt”. Interest on a “mortgage” for a taxpayer’s primary personal residence would be fully deductible, up to the current acquisition debt limitations. “Home equity debt” would have to be a totally separate loan, and interest on this type of loan would not be deductible. A Form 1098 would only be issued for interest paid on a “mortgage” loan, and the bank or mortgage company would be required to report only interest paid on up to $1 Million of principal, and indicate if the mortgage was secured by a primary personal residence.

One would not be able to refinance a home-secured loan to include both types of debt in one loan. Therefore a homeowner could not refinance a “mortgage” to get additional money in hand unless he/she could prove to the lender that the money is used to “substantially improve” the secured residence. One would have to refinance the “mortgage” for the exact same principal, adding perhaps related closing costs, and take out a separate “home equity” loan to get any money in hand.

By instituting these requirements a taxpayer, or his/her preparer, would truly be able to just take the amount of mortgage interest reported on the Form 1098 for the primary personal residence and transfer it to Schedule A.

 

And, while I would hope that the dreaded AMT is done away with, if it remained this policy would do away the "tax preference" adjustment for home equity interest.

So what do you think?

 

TTFN