Mortgage Debt Interest Deduction -- Yes or No?

About this time last year, there was a lot of noise about tax reform and how the government would be able to increase revenue by eliminating what some call loopholes.  In the same breath, many of our large-mouthed legislators spewed the idea that, somehow we could all pay lower taxes, and the government could collect more revenue.  Everything sounded really good as long as nobody was pressed for specifics.

One of the most noticed proposals was the removal of deductions for mortgage interest, and there are few real estate professionals who do not have strong opinions about this.  Once the "presidential candidate draft" has chosen a couple Democrats and a few dozen Republicans who aspire to White House residence, we'll begin to hear the tax reform stuff again.  It would probably be productive to re-ignite a discussion about mortgage debt interest decuctibility before we hear it from the hopeless hopefuls in a few months.

Last year, I wrote about the use of mortgage debt interest decuctibility and said in part:

Then there's the mortgage deduction, useless to most skin of their teeth first time home buyers and to those who have paid down their mortgage debt.  The banking industry loves the deduction, and one of their lobbyists, the NAR, also loves it.  Without it, some buyers could not afford the same level of debt that they want to take on.  Its cost to the government could be used much more effectively with another strategy to truly encourage home ownership.

The purpose of all tax code, either intended or unintended, is to control (influence if it makes you feel better) the behavior of the citizenry.  The bankers have brainwashed the general population and most real estate professionals to believe that mortgage deductions encourage home ownership.  Of course, they really mean that it encourages debt.

As long as the focus is on comprehensive tax policy reform, the debt deduction is probably safe.  However, it could come up as a stand alone issue, and the fact that interest rates are substantially lower than their traditional levels may make it easier for congress to make it happen.  My opinion is that a revenue neutral switch from a debt interest deduction to a homeowner tax credit taken without the need for an itemized return would benefit the real estate industry and all homeowners.