Tuesday, May 10, 2011

Proposed Changes to the Mortgage Interest Deduction - Can You Live Without It?

Sign of a mortgage centre in East LondonImage via WikipediaOur friends in Washington are talking about limiting or eliminating the mortgage interest deductions. This could be disastrous to people who bought a house counting on using that deduction. This would change the equation for many families who would have to pay much more in taxes. What would be the affect on the already down housing market, would it send it even further downward?

I don't think the politicians would have the courage or political will to eliminate a deduction most home owners count on. The mortgage interest deduction is the largest deductions that people use on their tax return. But I think they will do a little tinkering with it in the years to come.

I believe the congress does feel safe to cut the deductions on the extremely rich. Today, the deduction does have limits. You only can clain mortgage deductions on mortgages up to $1,000,000. It's proposed to move that limit down to $500,000. In most of the U.S. the average house sells for $200,000, so the change wouldn't effect many people. But on the West Coast, the average house price is $600,000, so many non-rich families would be effected.

Still another proposal would eliminate the deduction all together and just issue mortgage holders a tax credit.

What To Do?

If you have a mortgage of $500,000, it looks like your safe. The deduction probably won't change but if it does, it will probably turn into some type of credit.

If you have a mortgage of more than $500,000 you may lose some of your normal deductions. You may be wise to pay down your mortgage to get you under the upper limit. On the bright side, this changing of the deduction might encourage homeowners to buy a less expensive home so as to live more within their means.

Will Renters Be effected?

If the mortgage deduction is reduced will landlords pass on the extra taxes paid, onto the tenants? Here the congress has a way to fix that problem and that is to pay the renter a renters credit to off set the additional rent charge. But hopefully the coming changes would not effect investment property.

My normal interest paid on my mortgage comes to $10,000 per year. It's my largest deduction and any change would increase how much taxes I pay.

Who Is Pushing the Hardest Against This Change?

The "NATIONAL ASSOCIATION OF REALTOR" is up in arms concerning this proposal. They claim it will drive down home prices by 15%. This drop in home values will also cause a drop in property taxes collected, thus harming local and state services. So even non-home owners will suffer from this reduction in the deduction.

We all are used to this healthy tax deduction. We all save quite a bit of money every year. The deduction is a great incentive to buying a home and even a second or vacation home. But reducing it seems to be the wave of the future. I remember when they eliminated the credit card interest deduction. The sky was supposed to fall then, it didn't. We survived and don't even miss it now or remember it. This is what will happen with the mortgage deduction, we will survive.

1 comment:

  1. I agree- it will drive down home prices. I don't think that is a bad thing!


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