There has been talk of doing away with the deductions for real estate taxes, state income taxes, and mortgage interest. My new Tax Code would allow an itemized deduction for state and local income taxes, real estate taxes paid on the taxpayer’s primary personal residence only, and mortgage interest on acquisition debt only for the primary personal residence only.
So taxpayers who itemize would be able to deduct state and local income taxes paid, including state fund withholdings, and the real estate taxes and acquisition debt interest on the home in which they live.
There would be no current deduction for real estate taxes on any other real estate held by the taxpayer. Real estate taxes on vacation homes would be considered a personal expense and non-deductible. Real estate taxes on rental property would continue to be deductible as currently allowed on Schedule E. Real estate taxes on property held for investment, such as vacant lots or houses purchased to be “flipped”, would be capitalized and added to the cost basis in determining gain or loss. There would be no deduction for personal property taxes. Foreign tax paid would be allowed as a credit only, direct from a Form 1099 or K-1 and without the need for a Form 1116, regardless of the amount of the foreign tax paid.
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. There would be no 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.
Points on acquisition debt for a taxpayer’s primary principal residence would be deductible as mortgage interest – but would have to be “amortized” over the life of the mortgage in all situations. Points paid on the purchase of vacation or investment property would be capitalized and added to cost basis in determining gain or loss when sold.
Why would I allow these deductions in the new simple and fair Tax Code?
The Internal Revenue Code taxes Americans based on income measured in pure dollars. However it is a fact that 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, certainly New Jersey, Connecticut) or California that has 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. To be honest I have no idea how one would even begin to index for geography.
No deduction would be allowed for mortgage insurance premiums in any circumstances. This deduction should never have been allowed in the first place.
As of this writing I think I would keep the itemized deduction for investment interest as it is under current law, and continue to limit it to net investment income. Home equity interest could be deductible as investment interest under current tracking rules.