Study shows mortgage interest deduction doesn't encourage home ownership

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Submitted by ctr70 on March 23, 2014 - 8:20pm

http://online.wsj.com/news/articles/SB10...

Good article from the WSJ on a recent study on the mortgage interest deduction.

I would love to see the mortgage interest deduction scrapped all together and in return lower the federal income tax rates. This study shows that all the mortgage interest deduction does is help keep prices inflated in a few coastal markets in the U.S. It's of no help to the majority of homeowners in flyover states. Getting rid of this would be a great step in simplifying the tax code and then lowering the federal income tax rate to stop penalizing people for being financially successful at their jobs.

Prop 13 would be the other one good to see go. Get rid of prop 13 and in turn LOWER the state income tax. Stop punishing high w-2 income earners and inflating the real estate market. Changing the interest deduction AND getting rid of prop 13 would be two great steps towards reducing the artificial inflation of real estate prices in coastal CA and other high cost U.S. areas.

Submitted by Jazzman on March 23, 2014 - 8:59pm.

Agreed!

Submitted by scaredyclassic on March 23, 2014 - 9:48pm.

Phase it out slowly until I don't need it anymore. That seems fairest, to me.

Submitted by CA renter on March 23, 2014 - 10:48pm.

Yes, they would definitely have to phase it out. Agree that the MID is useless. As with any subsidy that's available to the general public, it's the sellers who benefit as prices rise to offset any "benefit" the buyers might have gotten.

Too many people think it's a good idea to spend $1.00 in order to "save" 25-30 cents (or less!).

Submitted by all on March 24, 2014 - 8:44am.

Paying taxes on any interest seems kind of unfair to me.

Submitted by Doofrat on March 24, 2014 - 10:35am.

CA renter wrote:
Too many people think it's a good idea to spend $1.00 in order to "save" 25-30 cents (or less!).

I think the understanding of this is somewhere between spending $1.00 to "save" 25-30 cents and -- I get to "write off" the whole dollar somewhere on my taxes but I don't know where because I just punch it into Turbo Tax or have my tax guy at H&R Block do it and it's a good thing because I get a refund that is free money and would probably have to pay $10,000 in taxes if I was a sucker paying rent.

Submitted by Coronita on March 24, 2014 - 12:53pm.

Or maybe some people figure out that with a 2.5 to 3% fixed rate loan ....

1) payments still end up being below rent even before tax benefits

And

2)instead or paying off a house early, younger people slightly more financially savvy can do better than 2.5% -3% by taking the nice low interest loan and investing whst otherwise would have been sunk into paying off a primary to generate higher return income elsewhere. Like maybe 34% last year in the stock market or 6-8% cash on cash in rentals or something else.

Afterall, its not like your primary is generating any income. I believe some folks call it being house rich but cash poor...

Submitted by FlyerInHi on March 24, 2014 - 2:40pm.

For the more entrepreneurial and leveraged, mortgage interest deduction works out better, I think.

Submitted by an on March 24, 2014 - 3:03pm.

I don't mind removing MID and prop 13 IF tax rate decrease enough to offset the additional tax, which means my net change tax dollar would be 0. However, I highly doubt that would ever happen. What would more likely happen is the removal of MID and Prop 13 but also increase in income tax. So, my first instinct is to object any kind of such proposal. Unless both tax rate decrease and removal of MID/prop 13 is on the same bill.

Submitted by CA renter on March 24, 2014 - 5:47pm.

AN wrote:
I don't mind removing MID and prop 13 IF tax rate decrease enough to offset the additional tax, which means my net change tax dollar would be 0. However, I highly doubt that would ever happen. What would more likely happen is the removal of MID and Prop 13 but also increase in income tax. So, my first instinct is to object any kind of such proposal. Unless both tax rate decrease and removal of MID/prop 13 is on the same bill.

I don't think they would increase the income tax rate if they eliminated MID and Prop 13, but they could (and should) leave it at the same levels, at least (possibly lower state income tax in CA a bit).

Again, these are tax subsidies that have questionable goals, with the exception of keeping people from being taxed out of their primary homes.

Submitted by CA renter on March 24, 2014 - 5:50pm.

all wrote:
Paying taxes on any interest seems kind of unfair to me.

You're not paying taxes on interest. You're paying taxes on whatever income you have, and interest is one expense that can be deducted.

Personally, I have a much bigger problem with corporations being able to deduct all of their expenses before paying taxes, while Joe Sixpack isn't able to do so himself. The standard deduction doesn't come anywhere close to the cost of very basic living expenses. If corporations can deduct ongoing expenses, middle and working-class individuals should be able to deduct expenses for a basic standard of living.

Submitted by joec on March 24, 2014 - 6:50pm.

FlyerInHi wrote:
For the more entrepreneurial and leveraged, mortgage interest deduction works out better, I think.

This is very true...Again, any change is going hurt one party and help another so they need to take a baseline of what we have now, and consider what to change since it'll hurt someone.

At the end of the day, I think a lot of us just wants what will be better for ourselves. It's selfish, but such is society and life nowadays.

The point about the MID not helping a lot of flyover states is more because their mortgage is just too low because their housing cost is too low compared to the standard deduction. With it being $12,400 now, if you aren't paying more than that in MID, you're better off probably using the standard deduction...depends on other items of course as well (donations, etc)...but it's not an issue with the MID itself.

Say you are someone who is a business owner and have lots of business expenses or simply decide to keep growing your business and run it at a loss (lots of tech companies do this actually)...Your tax rate is essentially 0 so taking away the MID which you might be using to offset, say IRA withdrawals or something hurts people who aren't pure w-2 earners.

I would vote for having simultaneous plans and you choose whichever one helps you better.

I honestly doubt the gov'ment folks can work together enough to make anything happen...especially in an election year.

They were talking about getting rid of this MID like 9 years ago I think and it got nowhere.

They can't even figure out the internet tax issue for the whole US.

It's just to make it look like they are trying to work I feel and "doing something" to justify their jobs.

Submitted by joec on March 24, 2014 - 6:50pm.

CA renter wrote:
all wrote:
Paying taxes on any interest seems kind of unfair to me.

You're not paying taxes on interest. You're paying taxes on whatever income you have, and interest is one expense that can be deducted.

Personally, I have a much bigger problem with corporations being able to deduct all of their expenses before paying taxes, while Joe Sixpack isn't able to do so himself. The standard deduction doesn't come anywhere close to the cost of very basic living expenses. If corporations can deduct ongoing expenses, middle and working-class individuals should be able to deduct expenses for a basic standard of living.

I agree with this as well...Businesses get taxed after every single expense they pay, Joe Sixpack can't deduct a thing...

Medical expenses? It has to be more than 10% now? Are you f*cking kidding me?

At the end of the day, someone has to pay and the government realizes it's easier to rip off the "middle-class" w-2 wage earner and Joey Sixpack than to challenge a corporation which has massive resources to work with and who contributes to their campaign.

I've had friends who were accountants at companies who's sole job was to find tax loopholes to use...

This is why I'm now favoring a 0% corporate tax now since large businesses will find a way around it anyways...They already have it all offshore at 0% places and anything over 0 will prevent the money from coming back to these shores. Even if that means giving it to shareholders.

They should just raise the dividend investment tax IMO to tax the same as income...That affects the wealthy far more, is passive income and is more fair compared to taxing W-2 secretaries, etc...

This is how extremely wealthy people like Bill Gates, Buffett has like a 10% effective tax rate since so much of their income is capital gains or dividends.

Submitted by Hatfield on March 24, 2014 - 7:02pm.

I always liked the idea of a flat tax for individuals. Get rid of all deductions and AMT entirely. Everyone gets a standard deduction of say, $80k, and then tax perhaps 25% of all income above that. You'd have to tinker with these numbers but I bet you could dial it in where overall revenues are about what they are today with a much fairer tax structure overall.

Submitted by CA renter on March 24, 2014 - 7:07pm.

Agree that ALL income should be taxed at the same rates. There is no reason for passive income to be taxed at a lower rate. This is clearly another tax law that was written by the wealthy, for the wealthy.

Submitted by Coronita on March 24, 2014 - 7:22pm.

So, for folks that have a primary home and also with the financial means and desire to stack up on more rental property(ies) with cash purchase(s)....

What's to prevent someone with equity in their primary home from taking out a cash out refinance, and use the proceeds to buy a rental property, and getting their mortgage interest deduction from the "other" way on their rental property income, instead of their primary home?

Seems like all it's doing for people with the means...is to shift the mortgage interest deduction from Schedule A (primary home) to Schedule E (rental property expense)..And adding some extra work/complication for folks to ensure that loans on the primary property is traceable to the properties that were purchased with the loan proceeds...

In any case, the amount deducted from your net income is more or less the same whether it's done on Schedule A or Schedule E, provided you don't have a net loss on your rental properties (for which you would have to carryover and not be able to offset other income unless you are a real estate professional)....

Doesn't seem like it's a very effective way to make richer people with the financial means to pay more taxes, if that's the intent. The only once it seems to hurt are people who only have a primary home who are cash poor with no plan or financial means of acquiring rental properties.

But I guess it does illustrate what a cluster f our tax code is, and why rich(er) people have much more variables to play with....

Submitted by SK in CV on March 24, 2014 - 7:46pm.

Hatfield wrote:
I always liked the idea of a flat tax for individuals. Get rid of all deductions and AMT entirely. Everyone gets a standard deduction of say, $80k, and then tax perhaps 25% of all income above that. You'd have to tinker with these numbers but I bet you could dial it in where overall revenues are about what they are today with a much fairer tax structure overall.

Most of the complications in the tax code have nothing to do with graduated marginal rates. They have to do with defining income. Under your flat tax idea, are the following items income?

Student loans

Cash out home refinance proceeds

Medical Insurance reimbursement

Medical insurance premiums paid by an employer on behalf of an employee

Other insurance reimbursements

Gross income from a trade or business (before any expenses)

Life insurance proceeds

I could go on. I hope you get my point.

Submitted by moneymaker on March 24, 2014 - 7:52pm.

Pretty sure that for a lot of us the MID is phased out with time, by the time you are halfway through paying on the mortgage the interest is pretty negligible compared to standard deduction, again that is just for most of us, does not apply to people that buy Mac Mansions or can itemize a lot of stuff (business owners).

Submitted by CA renter on March 24, 2014 - 10:58pm.

flu wrote:
So, for folks that have a primary home and also with the financial means and desire to stack up on more rental property(ies) with cash purchase(s)....

What's to prevent someone with equity in their primary home from taking out a cash out refinance, and use the proceeds to buy a rental property, and getting their mortgage interest deduction from the "other" way on their rental property income, instead of their primary home?

Seems like all it's doing for people with the means...is to shift the mortgage interest deduction from Schedule A (primary home) to Schedule E (rental property expense)..And adding some extra work/complication for folks to ensure that loans on the primary property is traceable to the properties that were purchased with the loan proceeds...

In any case, the amount deducted from your net income is more or less the same whether it's done on Schedule A or Schedule E, provided you don't have a net loss on your rental properties (for which you would have to carryover and not be able to offset other income unless you are a real estate professional)....

Doesn't seem like it's a very effective way to make richer people with the financial means to pay more taxes, if that's the intent. The only once it seems to hurt are people who only have a primary home who are cash poor with no plan or financial means of acquiring rental properties.

But I guess it does illustrate what a cluster f our tax code is, and why rich(er) people have much more variables to play with....

IMO, people who buy existing homes aren't producing anything, and should not be able to deduct interest. I favor eliminating all govt-backed loans, deductions for mortgage interest on rentals, and other benefits for residential landlords unless the benefits of these subsidies are shared with the tenants.

Of course, I am fully aware that I'm in the minority on this, but I think that only productive investment should be encouraged via out tax code.

Submitted by joec on March 25, 2014 - 8:25am.

moneymaker wrote:
Pretty sure that for a lot of us the MID is phased out with time, by the time you are halfway through paying on the mortgage the interest is pretty negligible compared to standard deduction, again that is just for most of us, does not apply to people that buy Mac Mansions or can itemize a lot of stuff (business owners).

One reason to refinance at year 10 or 15 of your loan to a 15 year at that time. Assuming the lower rate would make it close to the 30 year payment, you can continue to deduct the interest...

The problem with any changes now and why nothing will be done is that a lot of the comments here are biased as to what won't "hurt me" or said poster as much or people in elected office.

The tax code is too screwed up so any large scale changes would be near impossible to pass.

The problem with your idea CAR of not letting people who buy existing homes deduct MID is that now, you have just as much assisted all the new home builders/big businesses since now, people are more likely to want to buy new to get the MID...This point is why trying to "fix" this issue on what might be a good idea can't be done and I'd vote for either running 2 systems and take your pick and see what happens before forced changes or have massive deductions for all (lower state revenue) which screws up the state further though.

Also, it's not that your idea is in the minority...I think you posted that you are trying to eliminate all of your debt so your suggestion is very biased...

again, my point is that you (and everyone involved) are just looking out for their own interests rather than what's fair/right/etc...so you'd want to eliminate something which won't benefit you so you don't care if it's gone.

I plainly admit I am more interested in what works out better for me than what's fair since there is no fair system already and I just try to do it all to take advantage of what makes the most sense...

Sorta like as I have very little Roth accounts now, let's just start to tax that too.

Submitted by CA renter on March 25, 2014 - 4:45pm.

I need to clarify that I wasn't suggesting eliminating the MI deduction for *primary buyers* who buy an existing home, though I'm not opposed to that, either. I'm talking about eliminating the MID for speculators and "investors" who buy existing homes.

In other words, I think that the tax code should not encourage speculation in basic necessities and commodities; it should encourage productive investments like building *new* buildings or expanding or improving productive capacity in some way (capital expenditure). I don't think that people who are simply trying to buy food or housing should have to compete with well-funded, highly-leveraged "investors" who will greatly exaggerate price movements at the very worst times (when unusually high/low demand/supply are expected).

Submitted by Coronita on March 25, 2014 - 5:04pm.

CA renter wrote:
I need to clarify that I wasn't suggesting eliminating the MI deduction for *primary buyers* who buy an existing home, though I'm not opposed to that, either. I'm talking about eliminating the MID for speculators and "investors" who buy existing homes.

In other words, I think that the tax code should not encourage speculation in basic necessities and commodities; it should encourage productive investments like building *new* buildings or expanding or improving productive capacity in some way (capital expenditure). I don't think that people who are simply trying to buy food or housing should have to compete with well-funded, highly-leveraged "investors" who will greatly exaggerate price movements at the very worst times (when unusually high/low demand/supply are expected).

????? This doesn't make sense...

You don't get a mortgage interest deduction for speculation homes (IE your investment property(ies)) ...

MID applies to primary homes and vacation homes, as long as you stay within the 1.1 million threshold.

Interest related to "investment property" fall under "investment expense" (schedule E)...It's no different than any any sort of investment expense that you can report either for property or for other investments for that matter...It's considered cost of doing business....No different than other expenses related to investment properties (repair costs, upgrade costs,etc,etc,etc)...

Even taking a loan out on your primary and using it for investments is considered investment expense.. You don't deduct it on Schedule A if you were to do that... If instead you were to use borrowed money to invest on other things (stocks/mutual funds) that would fall under investment expense for stocks/mutual funds (not suggesting one should do that necessarily)...

Submitted by The-Shoveler on March 25, 2014 - 5:08pm.

I think this came up before, I think someone wanted to start a biz that match home owners to other home owners that would rent to each other LOL.

Actually not a bad Idea.

Submitted by scaredyclassic on March 25, 2014 - 6:09pm.

brilliant! there's alreadya website that matches high school seniors for arranged marriages for purposes of increasing financial aid. this is the future!

Submitted by scaredyclassic on March 25, 2014 - 6:31pm.

we can all rent each other's houses and deduct al our expenses! all we need is a busy lawyer. is this fraudulent? does anyone do this? seems like it could work intrafamily...

Submitted by Coronita on March 25, 2014 - 7:09pm.

The-Shoveler wrote:
I think this came up before, I think someone wanted to start a biz that match home owners to other home owners that would rent to each other LOL.

Actually not a bad Idea.

Negatory......You would need to report the rent as rental income....

And even if your expenses exceeded your rental income, if your AGI is >$150k you wouldn't be able to use loss to offset income from elsewhere...unless you happen to be a real estate professional.....And the phaseout of deduction rental losses starts at $100k.

Submitted by Hatfield on March 25, 2014 - 10:28pm.

SK in CV wrote:
Hatfield wrote:
I always liked the idea of a flat tax for individuals. Get rid of all deductions and AMT entirely. Everyone gets a standard deduction of say, $80k, and then tax perhaps 25% of all income above that. You'd have to tinker with these numbers but I bet you could dial it in where overall revenues are about what they are today with a much fairer tax structure overall.

Most of the complications in the tax code have nothing to do with graduated marginal rates. They have to do with defining income. Under your flat tax idea, are the following items income?

Student loans

Cash out home refinance proceeds

Medical Insurance reimbursement

Medical insurance premiums paid by an employer on behalf of an employee

Other insurance reimbursements

Gross income from a trade or business (before any expenses)

Life insurance proceeds

I could go on. I hope you get my point.

Actually, I have to confess that I don't. I'm not sure that I understand any of these obfuscations. Loans are not income, so you can strike those examples. Reimbursements are not income. Gross income from a business is not income, net income is.

Submitted by CA renter on March 25, 2014 - 11:47pm.

flu wrote:

????? This doesn't make sense...

You don't get a mortgage interest deduction for speculation homes (IE your investment property(ies)) ...

MID applies to primary homes and vacation homes, as long as you stay within the 1.1 million threshold.

Interest related to "investment property" fall under "investment expense" (schedule E)...It's no different than any any sort of investment expense that you can report either for property or for other investments for that matter...It's considered cost of doing business....No different than other expenses related to investment properties (repair costs, upgrade costs,etc,etc,etc)...

Even taking a loan out on your primary and using it for investments is considered investment expense.. You don't deduct it on Schedule A if you were to do that... If instead you were to use borrowed money to invest on other things (stocks/mutual funds) that would fall under investment expense for stocks/mutual funds (not suggesting one should do that necessarily)...

Right, I don't think flippers should be able to deduct mortgage interest (or any expenses) when flipping homes, nor should they have access to any govt-backed/GSE loans. I get that they don't usually deduct the mortgage interest in the same way that a primary owner/landlord does, but they do get to deduct it upon sale of the property. IOW, I think that there should be a *disincentive,* through the tax code and govt mortgage industry, to flipping homes.

"Investors" who buy existing homes to rent should also not get the MID in my ideal world. I totally understand the logic behind deductible expenses for business, but don't think that buying up SFHs in areas where there is a high demand for this for-sale housing from organic/end buyers who are looking to buy a primary home is "running a business." I'd rather see families -- who are looking for a primary residence -- have access to affordable homes that can be purchased with very conservative, traditional mortgages.

Again, I'm likely in the minority of one, but I have strong feelings about speculators and investors being in markets for basic necessities. Yes, I get that rental housing is still housing, but think that society is best served when the greatest possible number of people are in control of their own housing (stronger communities, lower crime rates, better maintained neighborhoods, etc.), and can benefit from owning a real asset and having a paid-off house upon retirement. I strongly dislike feudal societies and think we need to do everything in our power to prevent the concentration of power/wealth.

Submitted by The-Shoveler on March 26, 2014 - 6:12am.

delete

Submitted by Coronita on March 26, 2014 - 9:59am.

CA renter wrote:
flu wrote:

????? This doesn't make sense...

You don't get a mortgage interest deduction for speculation homes (IE your investment property(ies)) ...

MID applies to primary homes and vacation homes, as long as you stay within the 1.1 million threshold.

Interest related to "investment property" fall under "investment expense" (schedule E)...It's no different than any any sort of investment expense that you can report either for property or for other investments for that matter...It's considered cost of doing business....No different than other expenses related to investment properties (repair costs, upgrade costs,etc,etc,etc)...

Even taking a loan out on your primary and using it for investments is considered investment expense.. You don't deduct it on Schedule A if you were to do that... If instead you were to use borrowed money to invest on other things (stocks/mutual funds) that would fall under investment expense for stocks/mutual funds (not suggesting one should do that necessarily)...

Right, I don't think flippers should be able to deduct mortgage interest (or any expenses) when flipping homes, nor should they have access to any govt-backed/GSE loans. I get that they don't usually deduct the mortgage interest in the same way that a primary owner/landlord does, but they do get to deduct it upon sale of the property. IOW, I think that there should be a *disincentive,* through the tax code and govt mortgage industry, to flipping homes.

"Investors" who buy existing homes to rent should also not get the MID in my ideal world. I totally understand the logic behind deductible expenses for business, but don't think that buying up SFHs in areas where there is a high demand for this for-sale housing from organic/end buyers who are looking to buy a primary home is "running a business." I'd rather see families -- who are looking for a primary residence -- have access to affordable homes that can be purchased with very conservative, traditional mortgages.

Again, I'm likely in the minority of one, but I have strong feelings about speculators and investors being in markets for basic necessities. Yes, I get that rental housing is still housing, but think that society is best served when the greatest possible number of people are in control of their own housing (stronger communities, lower crime rates, better maintained neighborhoods, etc.), and can benefit from owning a real asset and having a paid-off house upon retirement. I strongly dislike feudal societies and think we need to do everything in our power to prevent the concentration of power/wealth.

Wait.

1. First of all, I thought flippers traditionally are cash buyers, no? At least they have to be if we're talking foreclosures....

2. Even if they were to take out a loan, it wouldn't be reported as mortgage interest deduction on schedule A. Again it would be investment interest expense on schedule E.

3. Flippers that take out a loan to flip a specific property isn't paying *that* much interest anyway if the flip is really a flip. Maybe 1-3 months?

4. And I have a question. How can you tell a flipper from a non flipper/investor?

Seems to me you're just asking for arbitrary restrictions on investments and or speculation...

So let me get this straight.. You're suggesting that someone that speculates and earns money should be taxed for income. But someone that speculates and loses money should eat the costs...

How is this different from the reverse of this scenaro: a bank that earns money keeps the profits, but a bank that takes heavy losses, the government and taxpayer ends up picking up for the loss (sound familiar)?

And let's take this one step further. Why stop at just flipping houses? Why not make this rule apply to all investments, including money you put into bonds, stocks, mutual funds, everything...

Everytime you earn a profit, you pay taxes on it. Every time you lose money, you can't use it to offset your gain... That would also "discourage" speculation, (as well as sound investing) would it? When was the last time you lost money on a bad debt or bad investment? Did you write it off or not? Or have you had a perfect track record of never losing any money on any of your investments?

Seems to me, in the suggestion you are making, it's government wins if you profit, government wins if you lose.

Uh, ok... I'm glad you're not a politician and I'm glad this idea is not very popular...

Submitted by spdrun on March 26, 2014 - 10:10am.

CA Renter -- how is renting SFH homes any different than buying anything else (like cars or power tools) on credit and opening a rental firm? Damn right that either example is a business, and all should benefit from loan interest deductions. If anything, the legalities and maintenance on real estate make it more work than some other rental businesses.

Want to keep homes affordable for primary residents? Make it a policy not to give loans where the cost of interest + taxes + expenses is greater than the market rent for the property.

Landlords seldom overpay, since their goal is to make a profit. The people who overpay are usually primary owners -- because OHMIGOD IT'S GOT A PERFECT VIEW, and the YARD is soooo BIIIIIG, PER-fect for little Bratty and Bethie to PLAY OUTSIDE after SCHOOL. AND the KITCHEN TILE, so RETRO CUUUUUUTE! zOMG GUSH!

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