An excerpt from the latimes.com – hat tip to profhoff:
If you take mortgage interest tax deductions, the next 100 days could have significant financial implications for you because of Congress’ new federal debt ceiling plan.
Although the compromise legislation itself involved no new taxes, it created an unusual mechanism — an evenly split, 12-member bipartisan super-committee that could call for major cutbacks on real estate write-offs by Thanksgiving.
All it will take is a single vote by a lone senator or House member who breaks with his or her party to put the mortgage interest deduction into serious play.
Here is what’s about to unfold and how it could affect you: The legislation signed by the president Aug. 2 calls for a two-step increase in the federal debt ceiling plus spending cuts of about $917 billion. It also created the Joint Select Committee on Deficit Reduction with the goal of slashing an additional $1.5 trillion from the deficit during the coming decade.
The committee is required to vote on a plan to achieve these objectives by Nov. 23, using revenue increases, spending cuts or a combination. If the committee members cannot agree on a plan or if either chamber of Congress votes it down, automatic and severe spending cuts of $1.5 trillion will be imposed equally on the Department of Defense and domestic programs including Medicare provider payments.
There is a real possibility that one or more members on either side could be concerned enough about the prospect of painful automatic military or social-program spending cuts that they would go with their conscience and break party ranks.
That compromise might well involve new revenue — one of the lowest-hanging sources of which is the mortgage interest deduction. Lobbying groups who seek to preserve housing write-offs already are gearing up for battle on Capitol Hill.
The National Assn. of Realtors sent an urgent alert to its 1.1 million members asking them to directly “engage their members of Congress on the importance of preserving real estate tax provisions” during the coming several weeks. Officials acknowledge that the super-committee’s structure — with its guaranteed punishments for failure aimed squarely at Republicans (military spending) and Democrats (social programs) — makes it more difficult than usual to influence the final outcome.
After decades of being considered politically sacrosanct, why are homeowner mortgage write-offs suddenly on the chopping block? No. 1 is sheer size. The congressional Joint Committee on Taxation estimates that the home mortgage interest deduction will cost the federal government $100 billion during fiscal 2011 and $107.3 billion in fiscal 2012. Between 2008 and 2012, the cumulative write-offs for mortgage interest are projected to total just under half a trillion dollars.
Among the options open to the super-committee: Lower the maximum mortgage amount eligible for interest deductions to $500,000 from the current $1.1 million; replace the deduction with a tax credit that would be usable by lower- and moderate-income owners as well as those with higher incomes; eliminate interest deductions on second homes; and phase out the deductibility of homeowner property tax payments.
Defenders of the write-offs argue that high levels of homeownership are essential to economic growth and social stability, and fully justify the tax system preferences they receive. National opinion polls regularly find widespread support for the write-offs, even among renters. Also, academic and trade group studies project that any abrupt, across-the-board reduction in the deductibility of mortgage interest would have a severe effect on home values, possibly sending them plummeting as much as 15%.
Critics, on the other hand, consider the write-offs inherently unfair: They’re skewed to benefit upper-income owners disproportionately, and are highly concentrated geographically along the West Coast, the Northeastern states and mid-Atlantic.
Where’s this debate ultimately headed? It’s much too early to predict. But any way you look at it, real estate write-offs could be in greater political jeopardy in the next three months than they have been at any time in the last 25 years.
The article does not point out the coastal center of the country issue as well. If the average house in Indianapolis is 160k the MID is worth a lot less than in North San Diego County or the NYC area. Given a 12k standard deduction in Indianapolis you have to stretch today to get total deductions much above the standard deduction, while in Ca its hard not to. Let alone look at some smaller towns in the midwest where houses go for in the neighborhood of 100k or less.
No one talks about this element of the debate.
Agree this is going to be a negotiating chip during the coming months…perhaps the “brain-trust” in Congress will come up with an approach which phases out the MID as income goes up.
Ought to be interesting to see what the NAR does with this — I would predict they will scream like a banshee in the night, but offer little real alternatives to this. At the end of the day, reform in this area is likely to be inevitable. God, I am so glad our house is fully paid for!!!!
Lyle – he mentioned it vaguely in the next-to-last paragraph, which is now highlighted. But agreed, another whack out of the wealthy, just like lowering the loan limits.
Upper-end real estate is for rich people who don’t care about being discriminated against by their government.
Other possibilities:
Get rid of all write-offs for state and local taxes, including property taxes. That would pump $343 billion into federal coffers from 2010 to 2014, and $862 billion by 2019.
Clamp a 15% cap on the value of all itemized deductions — not just mortgage interest and property taxes but also charitable contributions, medical expenses and casualty losses. The revenue windfall: $1.3 trillion over 10 years.
Revert to the capital gains approach that prevailed before 1987. Rather than taxing most gains at 15% as the current code does, the CBO plan would exclude 45% of gains from taxation and tax the remaining 55% at an individual’s regular tax rate. New money raised: $48 billion over the next decade.
https://www.bubbleinfo.com/2009/08/30/mid-changes/
At Jim,
re: Other possibilities.
YES.
Ummmm… has everyone forgotten the small real estate investor? You know, those of us that allow people that need or want to rent to live somewhere else than on top of and next to their neighbors in a cramped apartment? Look for a lot of us to dump multiple properties on the market, unless the deduction is grandfathered. Mortgage interest is a freaking business expense, one that was factored into the decision to invest.
15 percent decline in values? I don’t think those fools in Washington have a clue. A lot of owner occupant buyers in higher cost areas and buy and hold investors everywhere make decisions that include that deduction in the analysis. My guess is this could mean 25 percent or more declines in some markets as the investors and buyers head for the exits.
Another Investor,
I highly doubt that anything would change for people who own rental properties. Not allowing a real estate investor with rental properties (or any business owner) to deduct a cost of doing business goes against well entrenched and universally accepted business practices. If we ever do see any changes with the mortgage interest deduction, IMO it will focus on personal residences, and will primarily impact higher income taxpayers.
I wouldn’t expect that any MID phase-out would affect rental properties since it is not actually a deduction but an expense, just as maintenance on the property, etc. I hope I am not wrong about this otherwise rents would increase dramatically to
compensate.
Speaking as a would-be homeowner that would get a hefty MID — GOOD RIDDANCE!
Rents are a function of supply and demand, just like the prices of other goods and services. If demand goes up because there is less incentive for renters to buy, rents go up. If supply goes down because investors sell, rents go up. When rents go up enough, people will buy, independent of the deduction. However, they won’t be able to afford as much without the MID and the property tax deduction. The equilibrium point will shift, by how much is the question.
Just my two cents: I take the MID, and it is quite substantial in my case. Nevertheless, I think it would be good public policy to get rid of it or vastly reduce it. Maybe not overnight (it would be too disruptive), but slowly phasing it out over 5-10 years should work just fine.
This should really boost the foreclosure rate for the “big bombers”. Envy and schadenfreude, it’s what’s for dinner.
Time to party like it’s 2007!
MrBEE:
I think you might want to keep the party decorations in the closet for a while…I have a feeling lots of the “big bombers” do not have much if any loans on them. Someone told me a few years ago that a substantial number of the sales in RSF, for example, were all cash deals.
Wrapping your thoughts around this would seem to take a paradigm shift in thinking…however, I do think there are a fair number of the large homes in RSF, DM, LJ other areas which carry no mortgages.
Remove the deduction…guarantee a double dip Recession.
15% reduction in home prices is the least we should be worried about…I’m more worried about all the strategic defaults as people see their taxable income increase significantly.
Sort of related, as another thing on top of the MID to worry about as we get ready to buy – what’s the impact of the I-5 widening on coastal values, e.g. in SW Carlsbad in those gated communities off Poinsettia? I’ve spent a few hours reading the EIRs, trying to find addresses to go with the APNs and looking at the simulations and maps. Some of those homes are really close to the 5 already and others have terrific views of the 5 from their backyards. What will another 4 lanes and sound walls do? Geez, north county coastal is going to be like LA before you know it!
The answer is cuts, not tax increases:
In 2000 the government was taxing 1.9 trillion and spending 1.7 trillion.
In 2004 the government was taxing 1.8 trillion and spending 2.2 trillion.
……..Now, the government is taxing 2.2 trillion and spending 3.6 trillion.
“$917 billion + $1.5 trillion cuts over a decade”
200 billion savings per year, and most of the the cuts kick in towards the end of the decade. The federal government is current running 1.5 trillion deficits a year but we have to form a supercommittee to figure out how to cut 200 billion. This is like forming a committee to rearrange the deckchairs on the Titanic.
It seems like the amount the feds think they would gain would be offset by the reduction in revenue and increased costs to the fed as people bail out of their homes. Many people can barely afford their homes now, and if they don’t get the tax deduction, they will have no choice but to sell, which will drive down home prices, and create another downward spiral. That any sane politician would consider this as a policy option over trimming spending costs is absolutely insane. If this occurs, we’d better all strap ourselves and hold on…it’s gonna be a wild ride.
Please, let’s not get hysterical.
They’ll lower it from $1M to $500,000. What is the actual difference?
$500,000 x 5% interest = $25,000 x 50% tax = $12,500 actual difference per year, worst case. I’m not a tax guy, but once you cycle it through it is probably less.
Do you think that a rich guy is going to say, “No honey, we’re not buying your dream home that is 20% to 30% off peak pricing because I can’t afford $1,000 per month or because I’m ticked at the government for discriminating against me?
No way.
Is he going to demand a $12,000 discount? Good luck with that, because if it’s a dream house there will be others who aren’t as picky who’ll step in front of them.
NAR is dumber than a bag of rocks. Instead of blowing another $1,000,000 of my dues trying to fight it, they should get out in front with the actual numbers and support the 1/2 off plan, and look like heros.
We’re all coming to grips with having to give somewhere, and NAR could champion the cause.
If the double dip recession happens, it’ll start with believing the hysteria being pandered by people who don’t think it through (NAR, etc.).
I think it could boost sales if this committee comes out guns a blazing and cuts $2-3 trillion and then steps up to the microphone with a clear-cut leadership plan for the future.
P.S. 80 of 217 detached homes sold in 92067 and 92014 this year paid cash (37%).
>>”I think it could boost sales if this committee comes out guns a blazing and cuts $2-3 trillion and then steps up to the microphone with a clear-cut leadership plan for the future.”
Yeah, that’ll happen.
We are in the best of hands.
http://www.businessinsider.com/white-house-press-secretary-claims-unemployment-benefits-could-create-up-to-1-million-jobs-2011-8
”I think it could boost sales if this committee comes out guns a blazing and cuts $2-3 trillion and then steps up to the microphone with a clear-cut leadership plan for the future.”
Agreed, Jim. With regard to the uncertainty created by having the mortgage interest and property tax deductions on the chopping block, a clearly stated policy for further tax revenue increases which could allow potential and move up homebuyers to be able to realistically estimate their monthly expenses in purchasing a house would certainly be a step in the right direction!
In my own case, I feel like I have little idea of what my housing expenses + taxes could look like. Add to this the rumblings of Prop 13 ‘reforms’ here in CA, and that’s a lot of uncertainty about how much house I can afford.
1. Get rid of the M.I.D that primarily benefits those making 100k+ a year.
2. House prices go down.
3. Houses are more affordable!
Sounds good to me.
You could package up the MID, lower loan limits, the illusion of tighter qualifying, etc., and their impact on driving prices lower will pale in comparison to the impact of uncertainty.
The lack of leadership from federal, state, and local governments, the entire mortgage/banking industry, NAR, CAR and local associations of realtors, and major real estate sales organizations is where the problem is.
Nobody is talking, and there is no leadership or guidance for buyers to count on. SD_suntaxed speaks for the masses above.
Kudos to our local NSDCAR for at least publishing a short-sale checklist today. No mention of preventing SS fraud, but at least they issued something.
Plus they’ve tried to sex up their videos too:
http://www.youtube.com/watch?v=HwKJJngk67Q
Daniel at #20 – if I were president, I’d fire that spokesman immediately. The lack of respect he showed by insulting the reporter before answering was way out of line, especially when your boss has his back against the wall and the world economy is on the brink of collapse.
Whomever votes for this will be voted out of office.
Until the housing industry is stabilized this economy will continue to be depressed. Consumer confidence is back to the Jimmy Carter levels.
Now all we need is some inflation for some Stagflation 2.0…but I guess we should wait for QE3 for that to happen.
Warren Buffett on paying more taxes – he looks forward to more sacrifice:
http://www.nytimes.com/2011/08/15/opinion/stop-coddling-the-super-rich.html?_r=1
I think it’s reasonable for the government to collect a slightly bigger percentage of tax revenues. The tax rate of GDP is around 15-16% right now and it’s gotten as high as 20%, so you might be able to take in about $300-500 billion in taxes but you’d still have to cut about 1-1.2 trillion in spending to get to a balanced budget.
The housing market would live without the MID although there would probably be a couple years of pain as people adjust. It’s kind of interesting to see the panicked reactions by people when you take away their piece of the government cheese. We might actually turn into a real democracy again if we get rid of all the vote buying.
As an investment-real estate guy you might think I like the MID for commercial. However, I do not consider it a business expense but rather a choice. It is not a crucial part of business. Its simply a nice way to enhance yield in today’s low environment, but not needed like an employee, computers, office, power, etc.
It fuels increased speculation and yield driven results vs actual property performance.
Thus I would be all for eliminating it from the investment real estate world. At least reducing its effect above 50% of value as once you cross 50% LTV your operating risk begins to rise exponentially.
If the property cannot operate, and generate the required yield, in an unleveraged manner, you are likely overpaying for it.
I say discourage debt on investment real estate and let property fall into longer term-strong hands with sizable cash in play of 50% plus.
FYI – Most publicly traded, quality REITS are in the <60% debt range (mortgage + preferred + unsecured debt).
ps: the above post is not technicall referencing the MID but rather the same effective treatment of interest as a component of profit/loss and its deduction from taxable partnership income as the MID is to your personal taxable income.
Cap the MID at the Fannie Mae loan-limit amount, and on only one home.
If the MID is there to encourage home ownership, then it should be targeted at the low-end, since rich people are gonna own their own homes anyway — it’s the poor and middle-class who need assistance.
Homes in California and New York City cost more? So what? Living in high cost areas is a choice. And, by the way, removing/capping the MID will tend to drive down home prices — and home affordability is what we want, right?
But I would grandfather everything. A deal is a deal.
Thaylor Harmor: Whomever votes for this will be voted out of office.
Maybe in Coastal areas, but for the vast majority of the country, this looks just like another sop to the rich. The median family making $60k and living in a $175k house, don’t see much reason to subsidize people making payments on a $1.1M house on the beach.
So which group of legislators do you think are going to “be voted out of office”?
Don’t forget the pillsbury doughboy effect: lower prices mean smaller mortgages; meaning more pain for banks… nothing to offset losses on loans made 2002 to 2010 and beyond.
More bank failures, more job losses, more panic.
Monkeying with tax policy ex post facto for moral reasons is a dangerous ploy.
How about cutting out the cost of foreign wars? How about the bailout of Fannie and Freddie? How about adjusting entitlements to the reality of changed life expectancy? How about impacting high earners instead of middle-class?
Essentially, one big thing left keeping the middle class on life support is the MID. Take that away, and you’ll increase the divide. Makes no sense to me.
I hate the tea party and what it’s doing to this country. The rich are funding it, and they’ve gotten the sheeple to fight their war.
Chuck
I’m in favor of removing all deductions and credits from the tax code, especially the MID. This has to be one of the dumbest provisions we have. For so many people to think that it’s a good thing is a testament to how dumb a populace can be. Our govt is literally bribing people based on the amount of mortgage debt they incur.
-Max out the amount you buy, you get a bigger bribe.
-Make a minimum down payment, you get a bigger bribe.
-Refi to increase the loan amount and restart the amortization schedule, you get a bigger bribe.
-Be a responsible owner while making a significant down payment and paying off your loan as soon as possible, you get a smaller bribe.
This is a no-brainer: kill the MID. I’m sure they’ll go with a phase-out, but hopefully it’s no shorter than say 5 years. This is because there are too many idiots out there who literally cannot survive without the MID and will need to adjust to its absence in a more stable fashion. This is also all the more reason it needs to be axed.
That’s quite the wide broad-brush you’re painting with Chuck. “…the rich are funding [the tea party].” Yep, no rich funding the wacked out dems/liberals. Just rich republicans clinging to their guns & religion.
All voters are unanimous in saying please tax somebody else. But keep spending money, please. Brilliant.