Home Mortgage Interest Deduction

HOME MORTGAGE INTEREST DEDUCTION HISTORY Home mortgage interest is interest a homeowner pays on a loan secured by their home (a main home or a second home). The loan can be a mortgage to buy your home, a second mortgage, a line of credit, or a home equity loan. Home Mortgage Interest Deduction Home Mortgage Interest Deduction History Home mortgage interest is interest a homeowner pays on a loan secured by their home (a main home or a second home). The loan can be a mortgage to buy your home, a second mortgage, a line of credit, or a home equity loan. The home mortgage interest deduction is a very old tax deduction in the income tax law. Shortly after the 16th Amendment was ratified in 1913, the modern federal income tax was enacted. At that time all interest payments were made deductible. In 1986, the Tax Reform Act eliminated many tax deductions in the federal income tax, but it left the home mortgage interest deduction largely intact. It eliminated the deductibility of all consumer interest, including deductions for credit card debt and loans to finance cars, furniture, and other consumer durable items, but it retained a one million dollar limit on home mortgage interest deductions. Again in the 1990s, there were proposals to replace the income tax system with a system based on taxing consumption, and these plans proposed eliminating the home mortgage interest deduction. These plans died out, however, over arguments about how the removal of the tax deduction on mortgage interest would affect the housing market. Now, with the federal government strapped for cash and congressmen and women looking for ways to reduce the federal deficit, proposals are again being put forward to reduce the one million dollar limit or to completely remove the tax deduction on home mortgage interest. According to the Tax Policy Center: ôIn 2012, the MID [mortgage interest deduction] will cost the federal Treasury an estimated $131 billion, much more than the total of all outlays by the Department of Housing and Urban Development ($48 billion). Homeowners also benefit from other federal tax preferences, including deductibility of residential property taxes on owner-occupied homes ($31 billion), and exclusion of tax on the first $250,000 ($500,000 for joint returns) of capital gains on housing ($50 billion). Many economists believe that the United States encourages people to borrow money by offering the tax deduction of home mortgage interest. The home mortgage interest deduction helps promote home ownership, but many economists feel that a system that encourages people to take on more debt and discourages saving is not a good thing.