I think perhaps you misunderstood me , or else I’m misunderstanding you. What I am saying is that the police officers, waiter, and DMV clerks who work in Manhattan don’t live in super-expensive areas of Manhattan, and you don’t need to give tax breaks to people who own million dollar apartments in order for Manhattan to have DMV clerks. They can and do live in areas of the city and the surrounding area that are much less expensive. There often seems to be a perception on this board that all of NYC is million dollar apartments , but it’s not true. In my neighborhood (oh, the horror- I live in Queens), 400-500K doesn’t get you an apartment the size of a closet- it gets you a 2 family house so you can rent out the apartment to help pay the mortgage. And I expect the gardeners and waiters who work in Vail and Beverly Hills also live in less expensive surrounding areas, because they surely don’t live in million dollar houses.
Just for fun, I plugged a 30 year, 4.5% mortgage into an amortization calculator.
A 200,000 mortgage would be about 750 a month in interest. That’s 9,000 a year.
A 500,000 mortgage, 1,875.month in interest, 22,500 a year.
Let’s say property tax is 1% just for simplicity - this is deductible.
So for the 200,000 house your deduction is 9,000 + 2,000, or 11,000.
For the 500,000 house your deduction is 22,500 + 5,000, or 2,750.
The standard deduction for a single person is 5,950, married is 11,900. So a single person owning a 200,000 dollar house is better off itemizing, a married person is not. With the 500,000 house, itemizing is best all around.
All in all, it’s more of a deal for a single person than a married couple.
Single, 200K house: 11,000-5,950 = 5,050 more in deductions.
Married, 200K house: 11,900 in deductions with/without a house.
Single, 500K house: 22,500 - 5,950 = 16,500 more in deductions.
Married, 500K house: 22,500 - 11,900 = 10 600 more in deductions.
Let’s assume that someone who can afford the 200K house is in the 15% tax bracket, and someone who can afford the 500K house is in the 25% tax bracket.
That single person in the 200K house saves 757.50 in federal taxes (plus state taxes). The people in the big house save 4,125 or 2,650 in taxes. Clearly they’re deriving a lot more benefit from it than the (presumably) poorer person living in the 200K house.
750 dollars isn’t a huge amount of money but for someone who might be struggling to make that mortgage payment, it’s nothing to ignore either. I know that when we moved to our current house, the number-crunching I did assumed the tax savings we’d realize with the increased mortgage.
If you’re moving up to a million dollar house, your deduction goes up another 22,500 and your tax savings go up another 5 grand or so. You’re getting 5 times the house, and over 10 times the tax benefit, of the single person living in the 200,000 house.
When you get up into the kind of income where you can get a 500,000 mortgage (2,533 a month), then if that 200-300 bucks a month is that big a dealbreaker, you can’t afford the house.
Do I think the deduction should be eliminated entirely? Oh hell no. Especially at lower housing prices, the actual cost in tax revenue isn’t that great, and it does encourage home ownership. Do I think it needs to be capped? Yes. It quite clearly benefits the wealthy more than the people struggling to get into a house. Should it be clamped down to 500K right now? No - too abrupt. Like a lot of folks, I’m in an area where 500,000 isn’t an especially expensive home - and people who bought such places with one set of tax rules in place would be pretty badly hurt. So keep the cap, maybe drop it to 800 thousand and leave it there, and phase it out on second homes over a few years.
As another poster pointed out, as the standard deduction inches up, it gets closer to what most people would be paying on their mortgage (our mortgage deduction this year will only be a couple thousand more than the standard deduction).
Something to think of though: State income tax is deductible - if you itemize. If you don’t have the mortgage deduction, that state tax might not be enough on its own. Of course that’s another argument - I read an article talking about how high-tax coastal states (NY, Massachusetts etc.) are getting subsidized in a way by lower-tax states because of the much larger impact of their deduction on the federal tax revenue.
The government often uses tax policy to implement or influence social policies. Is this a good or bad thing? It depends but I’d be for reducing or even removing the defection for mortgage interest if it resulted in lower tax rates. Allow tax payers to make choices with their money. Moreover, it’s likely that tax revenues will rise over the long term if we reduce both rates and eliminate deductions.
Well, sure. You could move to East Palo Alto, and be fine except for the random bullet hole in your walls and the awful schools. When we moved here the real estate agents had books of test scores for all schools in the area readily available.
I’m from Queens, and Forest Hills is a lot different from Jamaica. And any part of it is more expensive than Oklahoma.
So, you want to penalize the person who wants good schools and a one hour commute? I’m fine with having people with massive houses pay more, but my point has been that it seems that some people think of a $500K house as a mansion with sheep - which may be true in some parts of the country, but not here. The person with the three hour commute is getting taxed also - not money directly (except gas taxes) but quality of life.
And school quality - which is more local. And in many cases being near the center of things. When I decided to leave my job in NJ there was basically nothing there I could go to. When I decided to leave my job in Santa Clara I could move to Menlo Park. That’s worth something also. Austin and Seattle might offer these opportunities somewhat, but not to the level we have here.
In addition to reducing the size of mortgage that can be deducted, I would also favor limiting the tax rate that can be applied to the deduction. Currently the mortgage interest deduction is very regressive in that wealthier people tend to have a bugger mortgage to be deducted, and then get a proportionally bigger benefit because they are saving taxes at a higher rate. Maybe the easiest way is simply to limit the size of the benefit in total, e.g. to $2,000 in total.
There again, why should wealthier people receive welfare through the tax code at all? In any tax deduction the beneficiaries are gaining at the expense of those who do not. The mortgage deduction subsidizes wealthier mortgage-holders at the expense of renters, poorer mortgage owners, and people who own their homes outright.
btw, people with $500k houses should not have $500k mortgages, so the discussion in this thread about what $500k buys is a little off.
Forest Hills is a lot different from Jamaica, but the person who can afford a house in Forest Hills doesn’t suddenly become poorer because he chose to live in Forest Hills rather than Ridgewood or any of the other neighborhoods less expensive than Forest Hills but nicer than Jamaica. And yes, all of NYC is more expensive than Oklahoma , but most of the jobs pay better than similar jobs in Oklahoma.
No, I don’t want to penalize the person who wants good schools and a one hour commute. What I want is for people to acknowledge that it is a choice, just like buying a BMW rather than a KIA, and the fact that you bought a house in a good school district where you would only have a one-hour commute *doesn’t make you poorer *than a person with the same income who chose a house with a three hour commute and put his kids in private school. You’re equally wealthy, you’ve just chosen to spend your money differently.
What about people that are married or where multiple wage earners live in one house? If I make $55,000 and my wife makes $55,000, it’s easy to get a $400,000 house. You can’t say that that’s wealth right there. And what if there were an adult child living at home, making maybe $30,000? Are you really wealthy then?
A mortgage interest calculator for that? A grade-schooler can do those figures in his head:
4.5% of $200,000 is $9000, and 4.5% of $500,000 is $22,500.
Is that realistic? My property tax is almost 2.5%.
If one wishes to support home ownership through tax policy, then scaling by average home prices is reasonable. Anyone not living in a leanto has made a choice to pay more for housing than is absolutely required. Telling someone that he is too rich for a tax break when he lives in exactly the same type of house and neighborhood as someone in another state is penalizing him.
Are there any tax deductions that take into account the cost of living in different parts of the country? And I don’t mean such things as “gas costs more in CA, so if you deduct it as a business expense, you get more of a deduction”. I mean a tax deduction that specifically calls out a different rate depending on where you live.
The thing is that a BMW is a BMW and a Kia is a Kia no matter where they are located. That’s not true of houses. A $200,000 house is a palace in Detroit, but a vermin-infested dump in New York.
And most of the good, high paying jobs are located in expensive cities. There is a reason people live in LA, SF, Chicago, NY etc. it’s because that’s where the jobs are. A family of 4 making 250k a year living in New York isn’t “rich”.
Excluded middle. The family of four making 250K a year isn’t “rich” anywhere, but they’re still upper middle class in NYC. One word: Poughkeepsie.
And where I am, 200K can get you a 3 bed/2 bath 2000+ sq foot single family home in good shape.
WHERE you live has much to do with how much house you can afford.
For 500K, you can find a 4 bed 3.5 bath with over 3500 sq feet here.
And if jobs were that mobile, then that’s where everyone would move. But if that happened, the price of houses where you lived would go up.
I’m trying to figure out what your point is with Poughkeepsie. Are you arguing that working in NYC and living in Poughkeepsie is an attractive option? Because a bit of research indicates that the commute (by train) is apparently 1 hour and 45 minutes each way and costs about $5,000/year after parking and tickets. (That’s just station to station, so you can guess that the transit on each end would add maybe another hour a day to your commute.) Anyone who has to commute for 3+ hours/day to find affordable housing is not living the good life.
Actually we are one of the top three cities where we ARE well into a recovery and creating jobs.
So salaries are equivalent between your city and say NY? Where do you live as that might help us compare.
It must be a fairly attractive option, because the coworkers I know with a three hour round trip commute generally lived in those areas before getting the job in NYC and could afford to live in NYC just as I do. They mostly just don’t want to live in the city itself , but it’s not because they can’t afford to.