Federal government may cut mortgage interest deduction
Q: I hear the government may be looking to cut the tax deduction homeowners get for paying interest on a mortgage. Is this serious? How much would this cost the average homeowner? How could they even think of doing such a thing at a time like this? -- Jayne C., Las Vegas
A: Unfortunately, there's truth to what you heard. Personally, I agree with the last part of your question about the idea of reducing or eliminating the mortgage interest deduction that helps the nation's estimated 75 million homeowners.
As we work our way through the worst economy since the Great Depression, I find myself asking the same question. I don't know what President Barack Obama and Congress will ultimately do with this issue, but a federal panel called the Deficit Reduction Commission charged with reducing the national debt recommended last month that the government should reduce the mortgage interest deduction.
Some economists and pundits have even suggested eliminating the MID.
I can tell you that the National Association of Realtors is pulling out all the stops to oppose any such effort. Realtors believe any reduction in the MID would hamper home sales, values and prices. It would also hurt the overall economy, especially during these tough times.
As NAR President Ron Phipps said when this commission released its recommendations, "The tax deductibility of interest paid on mortgages is a powerful incentive for home ownership and has been one of the simplest provisions in the federal tax code for more than 80 years."
He pointed to an NAR survey conducted in October by Harris Interactive of nearly 3,000 homeowners and renters. It found that nearly three-fourths of homeowners and two-thirds of renters said the mortgage interest deduction was extremely or very important to them.
Danielle Hale, an NAR research economist, recently wrote an article pointing out how much this could cost U.S. homeowners.
"If the mortgage interest and real estate tax deductions were eliminated, the loss would not be a one-year event," Hale wrote. "Homeowners (would) lose out on these potential savings each and every year. The present value of these lost savings could total $3.2 trillion."
As of 2009, the NAR researcher wrote, the value of all owner-occupied real estate in the United States in was about $19.3 trillion. If the lost tax savings are fully capitalized into the price of houses nationwide, she said, the average decline in home value would be 17 percent.
The nationwide median home price in late 2010 was $177,800. So, she concluded, "a decline in value of 17 percent, as projected, would mean a loss in home value of $29,500 for the typical homeowner."
Because these figures are based on a complete elimination of the MID, these are high-end estimates. These statistics will obviously vary depending on where you live and what changes, if any, the government may make to the MID.
Here are some more facts and figures from NAR putting this into perspective:
Of the roughly 75 million owner-occupied houses in the United States in 2009, 51 million, or 68 percent, had a mortgage.
In 2008, 38.5 million U.S. taxpayers claimed a deduction for mortgage interest, deducting a total of $470 billion.
The average taxpayer claiming the MID deducted $12,200 from their taxable income in 2008.
Therefore, the average taxpayer saved $3,050 in taxes by claiming the mortgage interest deduction.
The total tax savings from the MID in the United States in 2008 was $117 billion.
For more information on local real estate issues, consult a qualified local Realtor or visit lasvegasrealtor.com.
Paul Bell is the president of the Greater Las Vegas Association of Realtors and has worked in the real estate industry for 30 years. GLVAR has nearly 12,500 members. To ask him a question, e-mail him at ask@glvar.org. For more information, visit lasvegasrealtor.com. Questions may be edited for space and clarity.
