Goodbye Mortgage Interest Deduction?

In recent years there has been an on going attack on the mortgage interest tax deduction as part of the Congressional budget battle. This year that tax benefit may truly be in danger in part or in full.

Though the Federal Constitution requires it, this administration has yet to submit an annual national budget since entering office. One of the consequences has been continued budget debt limit increases, as budget shortfalls are now around $1 trillion per year.

With that in mind Congress is now more than ever likely to consider eliminating, or as least capping, the mortgage interest tax deduction as a means of increasing budget revenue. Any attempt at eliminating or radically reducing this deduction will once again be met with stiff resistance from the real estate, mortgage and home building industry.

As recently as 2010 the mortgage interest tax deduction saved homeowners $83 billion in deduction benefits. Most of this amount found it way back into the economy.

The most frequently mentioned changes in any mortgage interest deductions would be to eliminate the existing interest deduction allowed on a second home, and/or reducing the interest deduction for mortgage debt from the existing $1,000,000 level down to $500,000.

Though all homeowners may potentially be impacted by any Congressional decision, this administration and the Democrats are focused on top income earners, those earning more than $250,000 per year. One target proposal is to limit deductions to 28 percent for high-income earners.

Analysts project that high-income earners could, on average, save around $5,400 to $5,600. The Treasury Department projects that a 28 percent cap on this deduction for top earners could bring in $584 billion in tax revenue over the next 10 years. In addition the administration is recommending other tax changes for the top earners by limiting the amount of their deductions. Overall the Treasury Department says that this could raise $749 billion dollars over the 10-year period.

The argument against tampering with mortgage interest deduction is that it would reduce the demand for housing since one of the primary financial attractions to homeownership is this very deduction. If it were reduced or eliminated the incentive to purchase a home would be weakened. Analysts believe that this would depress home prices and potentially further stall the weak economy.

The National Association of Realtors has stated that the elimination of this tax benefit could potentially reduce property values by as much as 15 percent. If this were to occur the current upturn in the overall housing market could very well be in jeopardy.