Deficit Compromise Opens the Door for Huge Cutbacks in Mortgage Deduction

The “Gang of Six” compromise on the federal deficit that has been endorsed by President Obama mandates the most significant reductions in the mortgage interest deduction in the 98 years it has been in effect.

A memo outlining the broad strokes of the plan obtained by Real Estate Economy Watch authorizes the congressional finance committees to “Reform, not eliminate, tax expenditures for health, charitable giving, homeownership, and retirement, and retain support for low-income workers and families” in order to achieve $1 trillion additional revenues.”

Though exactly how the proposed budget reform package will affect the mortgage interest deduction won’t be known until the “Gang of Six” proposal is turned into legislation, significant changes for the MID are in store if it passes, and maybe not even then.

This afternoon Senate Majority Leader Harry Reid reported ge got a call from Congressional Budget Office Director Doug Elmendorf, who said the plan would take at least two weeks to score for cost and savings, putting the completion of that work just beyond the Aug. 2 deadline. Reid called the plan “wonderful” and said he does not want to diminish enthusiasm over it, but said alternatives still must be considered.

According to the latest estimates prepared by the congressional Joint Committee on Taxation, the mortgage-interest deduction will cost the government $99.8 billion in uncollected taxes this fiscal year and $107.3 billion in fiscal 2012. To achieve significant revenues, the compromise must reduce eligibility.

A starting point certainly will be the Administration’s budget proposal for the upcoming fiscal year. It included a relatively small cutback in mortgage interest write-offs - a 28 percent deduction cap on write-offs by single taxpayers with incomes higher than $200,000 and married taxpayers earning more than $250,000. Additionally, deductions for mortgage interest on second homes, home equity lines of credit, interest on second mortgages and capital gains exclusions for homes will likely be on the table. These were targeted by the administration’s deficit reduction commission last December.

Only taxpayers itemizing deductions are eligible for the MID on a principal residence or a second home. Since 1986, interest is deductible on only the first $1 million of debt used for acquiring, constructing, or substantially improving the residence, or the first $100,000 of home equity debt regardless of the purpose or use of the loan.

For a copy of the memo, click on the link below.

071911ConradBudgetExecutiveSummary.pdf