Lawmakers driven by need to find revenue
As Congress looks for new sources of revenue to deal with the looming “fiscal cliff,” a popular ingredient of the American dream could be on the chopping block.
It’s the mortgage interest tax break, which allows taxpayers to cut their taxable income by the amount of interest they pay on their home loans.
Long seen as an untouchable “third-rail” in Washington, D.C., the break is now on the table as the Obama administration and Republicans look for more tax revenue. While the real estate industry argues the break is essential to keep the housing market healthy, some economists are not convinced, and the deduction is a fat target because it primarily benefits high-income households and those who live in expensive housing markets.
“It’s incredibly significant to me,” said Satish Shenoy, who is shopping for a home in California’s Silicon Valley for his young family. “The mortgage deduction is one big reason to buy a house, versus renting.”
Buying a home in the area will mean taking on a $600,000 to $700,000 mortgage, said Shenoy, who manages cloud software sales for a Santa Clara, Calif.-based telecommunications company. At a combined state and federal tax rate of 30 percent, that could mean $6,000 to $7,000 the first year in tax savings.
That hefty tax break – multiplied by countless other homeowners across the U.S. – explains why any move to trim the deduction will spark an epic battle. Any major change is likely to be phased in over many years.
The deduction can be taken for interest on mortgages up to $1 million for a first or second home and interest up to $100,000 in home equity loans. It reduced federal tax revenue by $80 billion in 2010, according to a study by Pew Charitable Trusts based on Treasury Department estimates, making it one of the biggest personal tax breaks.
Discussions in Washington currently center on some form of cap on all deductions. That would inevitably limit the mortgage interest deduction, which is one of the largest tax breaks in dollar amounts.
Benefiting the most from the deduction are homeowners in high-cost areas such as California, Hawaii and New York, said Michael Gray, who operates a Silicon Valley accounting firm and the website Taxtrimmers.com.
“It would have a very dramatic impact on the housing market” in these states, he said. “To do this when the housing market is already down, on its back and trying to get back up again – I just don’t see it happening.”
The real estate industry argues that any abrupt elimination of the deduction would damage a fragile economy, cause home prices to drop and prevent some people from becoming first-time homebuyers.
“For some folks, that deduction makes the difference in their ability to maintain their status as homeowners,” said David Stark, public affairs director of the Bay East Association of Realtors in Pleasanton, Calif.