Yeah, but the standard deduction for a married couple (IIRC, Dogzilla is married) is $11,900.
Dogzilla is not married.
The problem is, $600,000 mortgages from, say, four or five years ago aren’t necessarily “upper middle class”, especially in Nancy Pelosi’s Congressional district.
Yes, they are. The median household income is $50,000. There is no way someone with that income could afford a $600,000 mortgage. If that is the median price for an area, then that is a rich or upper middle class area!
In that case, how you doin’? 
Okay, repealing the mortgage deduction will probably fuck you, then.
A phaseout over a reasonable period of time, say 10 years, would seem like an intelligent way to end the deduction. It would adversely affect fewer and fewer people with each passing year and home prices would have time to adjust.
If only we had a political system that would let us consider something like this.
Assuming that you can pay the mortgage on a $500k house, wouldn’t the monthly payments be like $2400, even without any property tax or insurance on it? I would think that with property tax and insurance, you’d be up in the $3300 area for monthly payments for this house, right? That would definitely put you in the upper-middle class for income required to meet that.
What’s going to happen to these housing markets when interest rates go up? I would be concerned about that if I lived there.
Let’s say that you still owe $85k on the mortgage, and your loan is at 4.5% APR. The yearly interest that you would get to deduct would only be $3800. The standard deduction for a single person in 2012 is $5950, so you can have a sizable amount of charitable deductions, and still be better off taking the standard deduction instead of itemizing. For your married neighbors, there’s a bigger difference and the standard deduction is an even better deal for them.
Are you sure you only get to deduct the interest on principal?
Some places are very expensive places to live. The absolute dollar figures don’t really tell you much when you’re comparing different regions.
For more discussion in the past - google SDMB Mortage Interest Tax Deduction
among others.
I find the arguements below persuasive.
From an article by Morgan Housel in the Motley Fool 11-23-2010 -
“If the cost of subsidizing mortgage interest were a line item in the federal budget, it’d rank as the seventh costliest – just ahead of education and veterans benefits. The federal government spends more money subsidizing mortgages than on anything other than defense, entitlements, unemployment insurance, and interest.”
“The only taxpayers who gain from the credit are the roughly one-third of filers who itemize deductions rather than take the standard deduction. By and large, these are upper-income folks. The Tax Policy Center crunched the numbers and found that a complete elimination of the mortgage interest deduction would raise taxes on only 21.5% of middle-income workers, with an average increase of just $215 a year. The bulk of the increase would fall on the top 10% of wage earners.”
Arguments against eliminating the deduction such as lower home ownership - “Homeownership rates in the U.K. actually rose after it eliminated a mortgage interest deduction in 2000, from approximately 70% to around 72% by 2005. Furthermore, homeownership rates in the U.S. are roughly equal to those in Canada and Australia, both of which don’t allow mortgage interest deduction.”
Another point the author makes:
"It also decreases labor mobility – the option of quickly moving to where the jobs are. University of Toronto professor Richard Florida finds that “The most innovative, most productive, and most highly skilled regions have rates of homeownership of 55-to-60 percent, while those where homeownership exceeds 75 or 80 percent are economically distressed.”
Not to mention that three identical houses on a block will have their owners paying three wildly different amounts of property tax. I can’t afford to move to a smaller house because my tax bill would skyrocket. Even more so for the guy two doors down who has been in his house 30 years.
That’s what I thought also, but the data seems to indicate otherwise. My position on this actually got changed by the facts.
If you’re going to get rid of deductions like this, it has to be universal. The whole reason the tax code has gotten as complex as it has is precisely because of the special pleading every interest group makes. You won’t find a single deduction that affects everyone in the same way, or which hits the same income groups uniformly.
For example, a tax increase on interest income might affect a wealthy 30-something investment banker, but the same tax will also hit a middle class retiree who dutifully saved all his life to have a comfortable retirement. A tax deduction on overseas income might make sense for a company that has significant exports into countries that have lower taxes to prevent them from simply moving their factory out of the country. That same tax deduction allows other companies with no such concerns to simply park money offshore to avoid taxes.
Because of these disparities in outcome, the changes to the tax code are offset by further exemptions or by extra conditions put on the exemptions (age deductions, employee deductions, whatever). The code gets more and more complex until the whole thing is a big net drag on the economy.
The good thing about simplifying the tax system is that it removes all the distortions caused by these tax breaks and special cases. It reduces tax-avoidance activity, and it reduces the accounting costs associated with paying taxes. But if you’re going to advocate eliminating deductions only on some people and not others, you’re not simplifying anything. You’re making it more complex.
As a political matter, if you want Republican support do you think they’d ever go for a ‘simplification’ that results in mostly-Republican constituents losing their deductions while the wealthy liberals in a mostly-liberal city are exempt? Because that would be the result. Because cities are more liberal than suburbs and rural areas, the result of an exemption for areas of high real estate costs would be a net wealth transfer from conservatives to liberals.
If San Fransisco or LA is too expensive to live in on a middle-class salary, the answer isn’t government subsidy anyway. That just makes the problem worse by making the area more attractive and increasing the pressure on real estate prices. The subsidies then wind up just flowing to the real estate developers anyway. The answer is to move. Or, the answer might be for the city to look at ways to reduce costs such as opening up more land for housing development, lowering taxes, getting rid of rent controls, and taking other steps to allow the housing market to work better.
Actually people are less rich, because they pay a higher percentage of their income on housing in order to be able to handle a house close to where they work. Those who couldn’t went to the outlying areas and commuted three hours a day. And they got screwed even worse than the people living close to Silicon Valley since purchases with money could now afford a close-in house and didn’t want a far away one.
The fact is that towns close to the jobs are built out and are considered highly desirable because of proximity and because of the good schools - which are good because people who can afford the houses send their kids there.
I don’t believe that someone living in an apartment the size of a closet in New York City with mold and bugs and bad plumbing is necessarily “rich,” especially if you look at the buying power of their disposable income.
Good point - I forgot to mention that you also get to deduct property taxes, which would probably tip the scale in your example. However, if the mortgage interest deduction is eliminated, you’d still be able to deduct property taxes. My house is paid off, and my property tax from any one year is not enough to make it beneficial for me to itemize (I’m married so the standard deduction is $11,900). However, I pay my property tax twice every other year (I’ll pay in Jan 2013 and Dec 2013, then next in Jan 2015 and Dec 2015) - at least here in Texas, property taxes are due at the end of January, but you can pay them early in December, and you get to deduct them in the year that you pay them. This lets me take the standard deduction in even-numbered years, and itemize in odd-numbered years. It averages out that I save a couple of thousand dollars a year by doing this.
I don’t care for the framing of the language there. I view the mortgage interest deduction not as a subsidy, but as the default way that an income tax needs to be applied for interest income and expenses. If I incur interest expenses in making investments, and the income from my investments is taxed, then I need to be able to deduct the interest expenses that were necessary for me to make that investment in the first place.
This is complicated for home ownership, because profit from your investment gets to be deferred for tax purposes, but still I think that the mortgage interest deduction is not a distortion of the market; removing that deduction would be a distortion.
I was actually referring to deducting the compounded interest, rather than just the yearly interest on the remaining principal.
John and I weren’t talking about San Francisco - we were talking about areas 40 miles south of San Francisco. In my town, which has no where near the highest prices around here:
- There is no more land for housing development, except on the hills which would be eyesores and not a great idea in earthquake country
- Lowering what taxes? Prop 13 discourages people from moving into smaller houses, which decreases the stock of housing and increases prices.
- My town has no rent control. In any case that affects the apartment market, not the house market.
As for simplifying the tax code, there was a reason why Romney and Ryan absolutely refused to say which loopholes they were going to close. Each one has a pretty strong backing and weak opposition. If everyone in Congress were in a mood to compromise than we might be able to get tax simplification, but that ain’t likely. If we can simplify this one piece it would be better.
In any case it seems only fair to count the size of a house, not its cost. Do you think a guy with a $300K mansion in the sticks deserves a tax break more than someone with a $350K fixer upper in an urban area?
Well, remember that local property and state taxes are also deductible. So if you’re a homeowner, all that stuff is going to add up.
Plenty of land in and around Manteca. 