Obama Budget Limits Mortgage Interest Deduction

Written by: Steve Cook   Tue, March 3, 2009 Crisis Watch

Talk about kicking someone when they are down!

Last week President Barack Obama proposed $634 billion in new taxes on upper-income Americans and cuts in government spending over the next decade to pay for his promised health care expansion. The new taxes included a limitation on the amount taxpayers earning over $250,000 can deduct for mortgage interest payments and other deductions.

Households paying income taxes at the 33 percent and 35 percent rates can currently claim deductions at those rates. Under the Obama proposal, they could deduct only 28 percent of the value of those payments. The changes would be phased in gradually and take full effect in 2011.

For the 2009 tax year, a taxpayer in the top bracket paying $1,000 of mortgage interest would see a tax break worth $350 reduced to $280. Deductions are capped on mortgages worth up to a total of $1 million on first or second homes.

The housing industry is howling but it may have a fight on its hands. The MID, which has not faced a serious assault in a decade, has come under concerted attack in recent years over its cost and for failing to make much difference in the nation’s homeownership rate, which is falling despite the best affordability conditions in a decade.

Some critics claim the MID artificially inflates the cost of property. “Research suggests that without the deduction, people would still buy the houses they do now; they would just cost a little less. In effect, the market would adjust downward to reflect some of the decrease in buyers’ purchasing power. Though no one knows, a plausible estimate is that prices at the upper end of the housing spectrum would fall by 10 to 15 percent. Prices of less expensive houses would probably rise a bit, because people who don’t get a break now would get the tax credit and thus could spend a little more,” wrote Roger Lowenstein in the New York Times Magazine on March 5, 2006.

Supporters say that current homeowners bought their homes on the expectation not only that they would enjoy tax deductibility, but that they would be able to resell their house at a higher price because of the imputed value of the tax deduction to the next owner. If you remove the deduction, most people will see a permanent decline in the value of their largest asset.

Within hours of the administration’s announcement last Thursday every major real estate organization had a fiery rebuttal on its web site. The mortgage bankers said the limitations could have an adverse effect on the market. The home builders said it will only hurt the ailing housing market. The National Association of Realtors is “prepared to use its formidable array of resources against it.”

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