Is The End Near For Mortgage-Interest Deductions?

Image courtesy of Well hello there.

Well hello there.

One of the benefits to homeownership has long been the ability to deduct any interest paid on your mortgage on your federal tax return. But with the so-called fiscal cliff looming in the new year, some folks in Washington are considering putting the deduction on the chopping block — or at least on a diet.

Every year, mortgage-interest deductions cost the U.S. around $100 billion, so they would seem like one huge cluster of low-hanging fruit for revenue-harvesting legislators to pick.

The White House-appointed Simpson-Bowles fiscal commission has already suggested capping the mortgage amount at $500,000 (it’s currently $1 million) and not allowing taxpayers to deduct interest payments for mortgages on second homes or equity lines of credit.

Some say the interest deductions are a luxury that mostly benefit wealthy homeowners with large mortgages.

USC law professor Edward Kleinbard tells the Washington Post, “It’s very much a subsidy to those Americans who need it least.”

The chief economist for Moody’s argues that since many homeowners factor in these deductions when they purchase a house, taking away the deductions will lower house prices. He does, however, believe that in the long-run it will better for everyone if the federal government can avoid driving off that fiscal cliff — and that changes to the mortgage-interest deduction will be a part of whatever plan the administration and Congress ultimately choose.

Understandably, the National Association of Realtors is not thrilled.

“It has always been NAR’s position that the [mortgage-interest deduction] is vital to the stability of the American housing market and economy,” the president of the National Association of Realtors, said in a statement. “And we will remain vigilant in opposing any future plan that modifies or excludes the deductibility of mortgage interest.”

Whatever changes are made to the mortgage-interest deduction, they will likely not be immediate and will be phased in over the course of the next few years.

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