There seems to be a consensus among real estate salespersons and their professional association that mortgage interest tax deductions play an integral role in facilitating home ownership. There are numerous solicitations based on, at least in part, the advantage of a tax deduction for "owning" over renting. By definition, those solicitations are aimed at first time home buyers.
Often, first time buyers have relatively low income and buy relatively low priced homes. Their mortgage debt does not generate enough interest expense to gain benefit from an itemized tax return over the standard deduction. Many first time buyers gain no tax advantage in owning over renting. The expected tax advantage is effectively a myth. They may be happy to enjoy the lifestyle upgrade often associated with owning over renting, but the tax advantage for their debt is non-existent.
How about the move-up buyer? Let's say that, for example, a homeowner sells his/her/their home with enough capital gain to make a down payment and cover sales and closing costs on a $375,000 house. Their debt would be about $300,000, and a 4% loan would generate around $12,000 in interest the first year, decreasing incrementally each year as the principal decreases. That $12,000 debt interest represents around $3,000 in tax savings in the first year. If they couldn't afford the payments without the tax deduction, they may be forced to carry only a $250,000 loan with the first year's interest a little lower. Let's see, could they still move up to a nicer house? I think so. Could they save money with a lower priced home and lower debt? I think so. So, would the lack of mortgage debt interest deduction hurt them? I doubt it, and it could ultimately help them.
How about the folks who have paid off their mortgage and no longer are able to deduct debt interest? Well, they may be happy to continue to be home owners, but they may not be happy to know that part of their tax burden is the result of others who have been convinced to carry high debt on their homes.
Prior to the presidency of actor-politician Ronald Reagan, all consumer interest was deductible. Reagan ended deductibility except for mortgage debt interest, and then the home equity loan business thrived. Buy a car and take out a loan? Take out a home equity loan and deduct the interest. High balances on the credit cards? Take out a home equity loan and pay them down to zero. If the deductibility of mortgage debt had been ended with all other consumer debt interest, our housing crash may have been just a little less severe.
So, who is helped by keeping mortgage debt interest deductible? Homeowners? Real estate salespersons? Banks? Nobody? I guess it's a matter of opinion, and I obviously have one.
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