Monday, December 10, 2012

Mortgage Interest Deduction Threatened

The mortgage interest tax deduction is also on the chopping block. This doesn't concern me as much, even though I am a beneficiary of it. The federal government subsidizes home ownership in dozens of ways, but I don't think this should be one of them.

Suppose a person with a $150,000 mortgage at 5% interest loses his mortgage interest deduction. So what if he can't deduct $7,500 from his taxable income? If he's in the 25% tax bracket, he won't save $1,875 on his taxes. This is going to stop him from buying a house?

The current proposal the Obama administration has on the table will reduce the limit on mortgage principal eligible for a deduction to $500,000 from the current $1 million. The tax deduction will be replaced by a tax credit capped at 12% of interest paid. Mortgage interest on second homes will no longer be tax deductible.

The National Association of Realtors says the mortgage interest deduction is sacred, and changes to the tax code will cause home prices to plummet. Critics of the tax reform say people will no longer be unable to afford to pay as much for homes without the tax subsidy. This is nonsense. When a person applies for a mortgage, the mortgage broker does not count the amount the buyer will save on his taxes as income.  

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