Abaco

Elimination of Mortgage Interest Deduction

45 posts in this topic

Over and above the disgusting sentiment of wanting to spread thievery around equally . . .

Precisely to whom is this insult directed?

Not to you, Vespasiano, but to Abaco who explicitly stated this principle, and anyone agreeing with him.

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Interest and taxes on rental property are deducted as costs of earning incoming from rent (on Schedule C), and are not part of the mortgage interest deduction being referred to on personal tax returns (Schedule A). The income tax on rental income is imposed on net income, not gross rent received.

Ok, but doesn't it seem probable that both would be affected by any such changes, by design?

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I happened across this, a bit of commentary and a link to a good study: http://modeledbehavior.com/2010/12/03/the-...ers-and-losers/

I object to the manipulation of the market and people's behavior that the MID creates. It falsely inflates the price of housing and creates artificial incentives.

You can't conclude anything about the matter from that rationalistic "study" or the Cleveland Federal Reserve's "argument". "Phasing out" a tax deduction is an increase in taxes. When someone assumes that NOT imposing a tax is "costing government" and that lack of a tax is a "staggering subsidy", and prefers direct "subsidies" intended to manipulate the market in the name of "efficiency", he forfeits any claim to credibility at all -- He is a statist central planner and a collectivist presuming that money not taxed belongs to the government and is more "efficiently" used under complete control of government.

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Interest and taxes on rental property are deducted as costs of earning incoming from rent (on Schedule C), and are not part of the mortgage interest deduction being referred to on personal tax returns (Schedule A). The income tax on rental income is imposed on net income, not gross rent received.

Ok, but doesn't it seem probable that both would be affected by any such changes, by design?

No. These thugs will take what they can get in tax increases of any kind, but the proposals to impose a new tax on income spent on mortgage interest are specifically for personal residential home mortgages declared in itemized deductions on Schedule A, not business costs due to interest on loans incurred as costs in earning income from rental property or other business activity. Those costs are deducted from gross receipts among many other such costs on Schedule E (not C - note previous typo) for rental income and Schedule C for other kinds of income so that the tax is imposed only on net income. If independent income were far more heavily taxed resulting from applying the tax rate to receipts, without regard to costs in generating the income, it would be a much more radical change wiping out almost all profits and much more, and the business activity could not survive. Net income is often only a small fraction of gross receipts because of the cost of investing in and maintaining capital and providing services.

This is not to say that the progressives would not eventually do that, too, if they could get away with it as they pursue the implications of their premise that all wealth belongs to government so that a tax not imposed is a "cost" to government. They are already generally agitating in their propaganda that deductions for business costs are "subsidies" and that such "loopholes" should be closed by changing the tax laws -- which they do not admit means to authorize new taxes. But they aren't yet very specific about the attack on business deductions because they don't yet dare name what they are really talking about. The closest they have come to that in any systematic way is the attack on deductions for depreciation because the financial meaning and role of depreciation is not widely understood by the general public.

Their spin is intended to manipulate, not be understood. That is why they use anti-concepts such as referring to taxes and government spending as "investment", demagoging not increasing taxes as "giving tax cuts to the rich" and increasing the "deficit", package-dealing "subsidies" with taxes not imposed as "costs to government", etc.

The proposed tax increase through eliminating the home mortgage deduction is a separate agenda item from the attack on business and the private economy that is much more specific and is much farther along in the process of pulling it off in the tax code.

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I certainly am under no delusion that the current talk of eliminating the mortgage interest deduction is anything other than a scheme to garner additional tax revenues. However your suggestion that this represents a "new tax they are not currently allowed to impose" is false. Not allowed by whom and/or what? The 16th Amendment is transparent: "They" are free to impose any tax upon any person and for any reason and by any calculus and at any time. Just as "they" arbitrarily threw bones at prospective home owners through the mortgage interest deduction, so too can "they" take them away whenever it suits "their" fancy.

Eliminating the mortgage deduction would in fact be a new tax they are not currently allowed to collect. If the IRS could collect it now it would be doing it. It cannot because the law does not allow it. The deduction is a law passed by Congress. The IRS (and more notoriously some state governments like Maine) "re-interpret" laws on their own to impose new taxes, but they do it by exploiting ambiguities; the IRS cannot on its own change basic deductions like the one for mortgages. That is why the proposal is for Congress to eliminate the deduction. A new tax imposed by Congress would be a new tax not currently authorized, not the closing of an unintended "loophole" or a "reinterpretation" by the IRS.

I do have a tendency to use "Congress" and "the IRS" interchangeably when discussing tax matters and am aware that this is not correct nor is it necessarily the best way to proceed. To clarify . . . when discussing tax law, I am referring to Congress. Again, with that slight modification I stand by my initial statement: the 16th Amendment grants Congress the power to impose taxes on any source and without limitation or objective qualification. Congress can do whatever it wishes in this regard and it usually does.

But that does not address the fact that removing the home mortgage interest deduction would in fact be a new tax not currently authorized. To ignore that taxes are collected in accordance with laws passed by Congress which authorize them is to obliterate the distinction between existing taxes and potential taxes. It matters that the IRS follows, subject to its "interpretation", laws passed by Congress, not what is potentially possible for Congress to do under the Constitution. A tax desired by the left but not authorized in law is a call for a new tax not currently authorized. They don't want to acknowledge or talk about that; they want people to believe that it is not currently being collected only because of some 'loophole' that should be 'corrected' in an existing tax. (An actual "loophole" is a technicality that someone finds to get around a law in a way that was not intended; the law intended these deductions not subjecting the income to taxation.) They don't want to admit that they are imposing new taxes, that the tax they want does not currently exist, and that not collecting it is not a "cost to government" or a "subsidy" to those not subjected to it.

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Over and above the disgusting sentiment of wanting to spread thievery around equally (any self-identified O'ists remember the phrase "Morality ends where the point of a gun begins"?), I'll note that those renting houses are very likely also indirectly gaining a benefit from any interest deductions that can be taken by the actual homeowner - and if their costs go up, it's a dead certainty that your rent will also rise.

This is aimed at me? Why? You confused me. What's an "O'ist"? ;) Who's spreading thievery around equally? Share your thoughts.

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This is aimed at me? Why? You confused me. What's an "O'ist"? ;) Who's spreading thievery around equally? Share your thoughts.

Actually the statement that I found most offensive was, I see, made by Zeus:

"This "deduction" unjustly penalizes renters. Everyone should be taxed the same. No-one should be privileged or favored. "

But however you cut it, eliminating this particular deduction would be like finishing off Starnesville with a nuclear weapon. Not only would it make an already bad housing market at least an order of magnitude worse - since very few people could afford a house without the deduction - it would bankrupt tens of millions of Americans. Not my idea of a good idea.

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But however you cut it, eliminating this particular deduction would be like finishing off Starnesville with a nuclear weapon. Not only would it make an already bad housing market at least an order of magnitude worse - since very few people could afford a house without the deduction - it would bankrupt tens of millions of Americans. Not my idea of a good idea.
Wouldn't eliminating the deduction fall under the heading of something to phase out to minimize the damage, much like a tiered phase out of Social Security? For example, existing home owners keep the deduction, but anyone buying after a cut-off date would not be eligible. Then, as taxes were lowered generally and regulations eliminated, those home owners who still had the deduction would no longer be in danger of financial ruin.

Incidentally, there is no such deduction in Australia.

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Wouldn't eliminating the deduction fall under the heading of something to phase out to minimize the damage, much like a tiered phase out of Social Security? For example, existing home owners keep the deduction, but anyone buying after a cut-off date would not be eligible. Then, as taxes were lowered generally and regulations eliminated, those home owners who still had the deduction would no longer be in danger of financial ruin.

This is essentially where I was going with this a couple pages ago. It is providing an incentive, then, when we've taken the bait, removing the the incentive, leaving the buyers stuck with a much larger effective payment than they budgeted for.

I had the same thing happen to my Health Savings Account a couple years ago: MSA's were replaced by HSA's, which allow for a larger deduction. The conversion wasn't mandatory, but highly recommended by my insurer in Oklahoma (where I worked at the time), who claimed there was no down side. After I had done that, my accountant, back in California, my home state, said that California had just passed a bill refusing to recognize the tax sheltered status of an HSA. MSA's were still recognized, but I couldn't revert. So I was suddenly screwed on my formerly tax-free medical account.

This was all so that the Leftists in CA grab more in taxes and reflected the general hostility of the Left to private medical care accounts for "the Wealthy."

So I've had that experience of having been promised and lied to by the gov't. The property tax deduction should be phased out, after the tax rate has been lowered, after the spending has been cut. The chances of all that? We'll see.

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This is aimed at me? Why? You confused me. What's an "O'ist"? :blink: Who's spreading thievery around equally? Share your thoughts.

Actually the statement that I found most offensive was, I see, made by Zeus:

"This "deduction" unjustly penalizes renters. Everyone should be taxed the same. No-one should be privileged or favored. "

But however you cut it, eliminating this particular deduction would be like finishing off Starnesville with a nuclear weapon. Not only would it make an already bad housing market at least an order of magnitude worse - since very few people could afford a house without the deduction - it would bankrupt tens of millions of Americans. Not my idea of a good idea.

Oh, ok. I don't think it unjustly punishes renters either.

You know - I suppose it's a matter of perspective. I've only taken the deduction about 1/3 of my post-college life. I was house poor once and vowed to never have it happen again. Life is actually better without acquiring the debt for it. But, I realize most may not think that way. I guess having half or more of your net income go towards your mortgage is the norm. Homes in my region have, over the past 20 years, appreciated at an annual rate of 1.5%, while mortgage interest rates are many times higher than that. The duduction, if being taken, hasn't made up the difference. I've had more money to buy gold, which has appreciated at a much higher rate than real estate. In looking at the overall picture I've come to the conclusion that the deduction is a ruse and is not as viable a financial tool as Barney Frank might say it is. (little joke there) In becoming buried in a mortgage, many Americans have not been able to diversify their investments sufficiently and are now barely treading water. Some experts (Merk, Schiff) even argue that your home shouldn't be viewed as an investment at all (a take I find interesting). Anyway...I'm rambling.

I appreciate all the input on this thread, by the way. I was really curious about the views here on this. I'm confident that the deduction will never be taken away but was intrigued by the idea being floated by the administration recently.

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Abaco, just a further item for you to think about. The value of gold has not really been increasing it is inflation that gives the seeming increase, but in actuality gold is worth about the same. As the increase of gold keeps moving upward people should be fearful as their liberties are being destroyed.

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Abaco, just a further item for you to think about. The value of gold has not really been increasing it is inflation that gives the seeming increase, but in actuality gold is worth about the same. As the increase of gold keeps moving upward people should be fearful as their liberties are being destroyed.

Goldman Sachs recently called for gold at USD 11,000/oz. That's eleven thousand. Food for thought, even if a GS wild claim is not unusual.

I would just caution any people who are overly invested in gold to diversify somewhat (other assets are less inflated and well able to preserve their value, such as timber land or even some equities). If by the force of the willpower of the American People the socialists are gotten rid off, the economy is restructured and the wild devaluation is halted, the market will be swift to restore gold to its growth-time lows. Most probably not 100, but people were calling it high at 400 not so long ago...

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Wouldn't eliminating the deduction fall under the heading of something to phase out to minimize the damage, much like a tiered phase out of Social Security? For example, existing home owners keep the deduction, but anyone buying after a cut-off date would not be eligible. Then, as taxes were lowered generally and regulations eliminated, those home owners who still had the deduction would no longer be in danger of financial ruin.

This is essentially where I was going with this a couple pages ago. It is providing an incentive, then, when we've taken the bait, removing the the incentive, leaving the buyers stuck with a much larger effective payment than they budgeted for.

Yes, exactly. It would be one thing if such a deduction never existed. But every primary homeowner with a mortgage has it and uses it.

Jason: But such a distinction would result in making home sales much more difficult, again. Suppose one had a "grandfathered" mortgage. Many of those buying a house owned a previous house; it would be a large disincentive to move to a new one that had a non-interest-deductible mortgage. That would also have the effect of yet more social manipulation. "Oh, I'd love to take that job in xyz, but I can't afford to lose the mortgage deduction ...."

I say keep the deduction forever. It happens to be one way that some can keep a bit of their money away from a gov't that considers 100% of what you make morally theirs.

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In my mind, this is low on the list of things to mess with, anyway. In some better future where the government is much more limited to its proper functions, this may be something to consider, but until then I concur with Phil. As it stands, more people ought to rent until they really can afford a property.

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If we are to have taxes at a certain level, we'd all be much better off with a very simple tax rate than with a higher base rate filled with complex deductions. The latter gets the tax code in the way of rational economic decisions, favoring certain investments over others. It costs time and money to merely comply with the code. It leaves open the doubt of whether one has actually complied, with the possibility of future legal actions. For businessmen, it clouds one's planning. But most of all, it opens the door to political manipulation and corruption. A flat tax with no deductions would simplify our lives immensely.

Why did we have a housing bubble over the last ten years? The tax code was one part of it, as it favored real estate over other investments. What other investment has so much margin (zero down loans!), a huge capital-gains-tax exemption, as well as a deduction for interest on the loan? Now if the government had in fact provided the same tax incentives for other investment vehicles we may not have had such a distorted market. (Other factors contributed to the bubble, of course, but this was certainly a big one!)

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Wouldn't eliminating the deduction fall under the heading of something to phase out to minimize the damage, much like a tiered phase out of Social Security? For example, existing home owners keep the deduction, but anyone buying after a cut-off date would not be eligible. Then, as taxes were lowered generally and regulations eliminated, those home owners who still had the deduction would no longer be in danger of financial ruin.

This is essentially where I was going with this a couple pages ago. It is providing an incentive, then, when we've taken the bait, removing the the incentive, leaving the buyers stuck with a much larger effective payment than they budgeted for.

Yes, exactly. It would be one thing if such a deduction never existed. But every primary homeowner with a mortgage has it and uses it.

Jason: But such a distinction would result in making home sales much more difficult, again. Suppose one had a "grandfathered" mortgage. Many of those buying a house owned a previous house; it would be a large disincentive to move to a new one that had a non-interest-deductible mortgage. That would also have the effect of yet more social manipulation. "Oh, I'd love to take that job in xyz, but I can't afford to lose the mortgage deduction ...."

I say keep the deduction forever. It happens to be one way that some can keep a bit of their money away from a gov't that considers 100% of what you make morally theirs.

I have two homes, still with mortgages, and I haven't used it for at least a decade. And, I'm not wealthy, at all. Based on my own experiences, life is better when you don't use it. Like I said before, it comes down to perspective.

One thing about allan's comment regarding a "tiered phase out of social security" triggered a thought. Of course, such phase out hasn't happened. But what has happened is that we are expected to pay for SS under the ruse that we'll eventually get the money back. But, in reality, I'll probably never get it. I pay more into social security monthly than I've ever paid for a car payment. It's really just become a tax and nothing more. Frankly, I'd be happier if they took the money from me each month and just renamed it, or just rolled the payment into my income tax witheld. It's the insulting shell game that really frosts me. Recently, I had to visit the Social Security office after the birth of my daughter. Being somebody who designs buildings, I took great interest in how that office was constructed. I've never seen a more fortified structure in my life, and I've worked on military bases. You'd think they're expecting a major attack at the site. Even the steel fence, with beam posts, has braided steel cables hidden in it. I had a good laugh about that. They don't have to fear me. I've accepted that I'm not getting the money back. :blink: (I have a twisted sense of humor, I admit)

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Based on my own experiences, life is better when you don't use it.

Life is better when you don't keep thousands of dollars more of the money that you earned from being taken by force? Can you explain the logic again?

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Based on my own experiences, life is better when you don't use it.

Life is better when you don't keep thousands of dollars more of the money that you earned from being taken by force? Can you explain the logic again?

Sure PhilO. In running the numbers I came to the conclusion that a mortgage that would allow much of a deduction was cost-prohibitive. It entices people to acquire a level of debt such that they may end up "house poor". I think this has exacerbated this housing collapse as more house-poor people have gone under water. That would be less than optimum. Instead, I acquired a relatively small mortgage on my properties and now have more income for things for my family, like vacations and private school, than I would have had if I had taken on more debt (to acquire the mortgage deduction). I hope that makes sense. I did have a deduction on one property for about a decade. It was nice.

If I had more time I'd jot down some numbers to explain. One thing that jumps out on the numbers is the rate of appreciation for housing vs. the mortgage interest. I understand that a house is a special, valuable asset for any family. But, if one is to look at it as an actual investment (I'm on the fence on that theory) one should look at the interest paid on the loan vs. the rate of appreciation. If, as is the case in my region, the annual rate of appreciation of an investment property is about 1.5% the buyer would need a pretty aggressive loan rate to have it pencil out (not to mention maintenence, property taxes, etc). As we've seen recently - a lot of people took loans on properties that didn't pencil out.

I was just talking with a colleage about this yesterday. I remember being referred to a real estate investment "expert" back in 2006. He looked at my equity and strongly suggested that I take out equity debt and buy another property. I mulled it over for a few days and, going with my gut, opted not to follow his advice. Looking back, it would have been a very bad move.

I'm just an engineer, not a financial guy. I may be full of kimchee. But, I've thought that tax code is written to influence behavior. Some would agree and some would disagree. I don't think it's written to help us out. The government doesn't write it a certain way because they like us.

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[...]

Ok, I see. I interpreted what you said to mean that you *could* take the deduction but chose not to. I certainly do see the sense and logic in wanting to avoid a mortgage altogether, or as close to one as you can afford. But I think that is a separate issue.

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