Will Congress Toss the Mortgage Interest Deduction off the “Fiscal Cliff”?

The mortgage interest deduction was established to bolster a flagging housing industry and to encourage homeownership and family wealth building. 

Some financial experts however, are starting to question whether the deduction is the best tool to encourage homeownership because it seems to be more valuable to buyers in the higher cost housing markets and thus those families in the upper income brackets generally take the deduction most often. 

IRS data shows that homeowners earning $150K or more claim about half of the mortgage interested deducted.  This income bracket pays 73% of all income taxes.  Homeowners making less than $50K, claim only 8% of the deductions.

IRS data underscores the uneven national usage of the mortgage interest deduction, which is popular in high-cost areas but rarely claimed in areas with low housing costs. The mortgage deduction is available only to those who itemize their deductions, and the numbers work only for taxpayers whose total deductions for mortgage interest, charitable giving and other expenses, are worth more than the standard deduction.  

In states with high housing costs the deduction is used by a much greater number of taxpayers than in areas with low housing values.  Maryland has one of the highest deduction rates with 37% of taxpayers using the benefit, to the low of 15% in West Virginia and North Dakota. 

Lawmakers seem to have forgotten that the mortgage interest deduction is a good policy for their constituents because it brings some taxpayer relief and community prosperity.  A California Association of Realtors survey found that 79% of buyers feel that the mortgage interest deduction was a “key factor” in their decision to buy.  The National Association of Home Builders poll this year also showed that 73% of taxpayers are opposed to any changes in the deduction.

So with that kind of wide public support for the deduction, why would Congress and President Obama be eyeing the deduction as a way to close the gap between what the government spends and what it takes in, to avert the “fiscal cliff”?   According to IRS data, the average mortgage interest deduction is $12,000 a year per taxpayer.  That costs the Federal Treasury a whopping $108 Billion a year in additional un-collected taxes. 

Changing or eliminating the Mortgage Interest Deduction most certainly would have a negative effect on the current real estate market, still fighting its way back from a recession.  The housing market and homeowners have come to rely on the mortgage interest deduction, making it one of the more popular rules in our tax code.  Even a homeowner that does not take the deduction can benefit in a real estate transaction when selling their property to a buyer that is planning to use the deduction.  Having the deduction also helps increase the amount the buyer may be able to pay. 

So if the mortgage interest deduction has helped the real estate industry bounce back, benefits both buyers and sellers, encourages homeownership, wealth building and strengthens our communities… ask yourself...what should Washington do?