Title:
Honey, I Shrunk
The Mortgage Interest Deduction – Plan 1
Word Count:
368
Summary:
The political
landscape this year has been nothing but ugly. It promises to come to full boil
with the proposed tax reform eliminating or reducing the mortgage interest
deduction.
Keywords:
mortgage interest
deduction, tax reform, fha, housing marketing, real estate boom,
Article Body:
The political
landscape this year has been nothing but ugly. It promises to come to full boil
with the proposed tax reform eliminating or reducing the mortgage interest
deduction.
Tax Reform or Raising Taxes
There is an old saying about the two political parties. Democrats raise taxes
while Republicans reform taxes. In both instances, we end up paying more money.
In a very brave move, a bipartisan committee is recommending tax reform that
goes after the beloved mortgage interest deduction.
The committee looking into tax reform was given a directive by President Bush
to simplify a tax code that is universally agreed to be a disaster area. You
may not realize it, but two additional sections are added to code every day on
average. One of the particular problems is the Alternative Minimum Tax, which
was originally designed to keep super wealthy people from avoiding taxes.
Because it was written poorly, the AMT now affects a large percentage of
people. The problem, however, is how do you get a make up for a tax that
produces millions of dollars in revenue for the government?
The committee’s answer is to go after the mortgage interest deduction. The
committee has offered two plans and we’ll look at the first one here.
In the first plan, the mortgage interest deduction would be reduced to a figure
related to the loan amount the FHA will back. The FHA was set up to help low
income individuals get homes, which means the effective cap on the deduction
would be very low. In San Diego, the average single-family home costs in excess
of $600,00. The FHA cap for the city is around $315,000, which means homeowners
would lose approximately half of their deduction. In expensive real estate
areas, this will mean many people will lose the ability to make their mortgage
payments, which means defaults. With borrower defaults will come the end of the
housing market boom. The loss of equity will, of course, cause many people to
go upside down on their loan, which will be another disaster.
If Congress pursues a cap on the mortgage interest deduction, chaos will reign.
It is hard to imagine this option being adopted by the politicians.