Thursday, June 10, 2010


Howard Gleckman believes that the mortgage interest deduction “is not a very efficient way to encourage home ownership. Most benefits go to high-income households that would probably buy a house with or without the deduction. Since non-itemizers get no benefit from the deduction, it is not surprising that most of the subsidy goes to upper-bracket taxpayers.” His post goes on to look at the alternatives to the current itemized deduction.

While I would support doing away with the “home equity” portion of the mortgage interest deduction, I am totally against repealing the deduction for acquisition debt.

The Internal Revenue Code taxes us based on income measured in pure dollars. However it is a fact that the “value” of one’s level of income differs based on one’s geographical location. A family living in the northeast (New York, certainly New Jersey, Connecticut) that has an income of $150,000 may be just getting by, while a similar family that resides elsewhere lives like royalty on $150,000. Many components of the Tax Code are indexed for inflation, but nothing is indexed for geography. To be honest I have no idea how one would even begin to index for geography.

It costs an awful lot to live in, for example, New York, certainly New Jersey, and Connecticut. State and local income, property and sales taxes are the highest in the country. The cost of real estate is also excessively high. As a result one must earn a lot more money to be able to live in these states – and salaries are arbitrarily increased to reflect the increased cost of living. Yet $150,000 in income is taxed by the federal government at the same rate in New York City as it is in Hope, Arkansas.

Because taxes and the cost of a home, and therefore also the amount of “acquisition debt” mortgage interest paid on a residence, are higher in the Northeast, the deduction for these items helps to somewhat geographically “equalize” the tax burden. Because one is taxed on net income after deductions, the larger deductions for taxes and mortgage interest causes those in higher cost-of-living areas to pay less income tax on the same gross income.

If the mortgage interest deduction is limited to acquisition indebtedness then more needs to be written in the legislation than just doing away with the deduction for interest for home-secured borrowing that is not used to buy, build or substantially improve a personal residence. Just doing away with the deduction would put an even greater recordkeeping burden on the taxpayer, and ultimately the tax preparer.

The legislation must create special new rules for banks and mortgage companies for issuing home-secured loans.

A “mortgage” loan would only be permitted for “acquisition debt”. Interest on a “mortgage” 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.

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, could then truly just take the amount of interest reported on the Form 1098 and transfer it to Schedule A.
So what do you think?


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