Saturday, August 29, 2009

Mortgage interest deduction in the crosshairs

I wonder how many people buying homes planned on having the whole deduction when buying. Just as important.. How many banks are underwriting with the future heavier tax burdens of the borrowers in mind? FHA and GSE's certainly aren't factoring it in.

From the LA Times:
Tops on the CBO's hit list for housing: Slash deductions for homeowner mortgage interest from the present $1.1-million limit to $500,000, phased in with $100,000 annual reductions starting in 2013.

Taxpayers now can write off mortgage interest on their principal home debt up to $1 million and on home equity debt up to $100,000. Under the CBO's option, that maximum mortgage debt amount would shrink yearly until it hit $500,000. Over a 10-year period, this change would boost tax collections by an estimated $41 billion.

The CBO offered up a second option if Congress wants to raise a lot more money: Replace the mortgage interest deduction with a flat 15% tax credit for everybody with mortgage amounts below the declining limits in the first option. Rather than taking write-offs tied to income tax bracket, every homeowner would get a credit worth 15% of mortgage interest paid.

This would be effective wage deflation for many. The NAR will definitely gunning full bore for mortgage interest deductions to be left alone. I am thinking this might be more of a political move to try and pass the "compromise" of maxing out the deduction at 28% as has been suggested in a few different places. For high cost areas like California the deduction is a much bigger part of "affordability" than lower cost, lower wage areas of the country.

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