Author Topic: Sounds like the mortgage interest deduction may be changing...  (Read 6330 times)

FlorenceMcGillicutty

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It the top Republican on Senate Finance says it's going to happen, chances are it will--at least in some form. I don't have a rental property, but for those who do (or who are thinking of buying one), if you couldn't deduct the mortgage, would it change your behavior regarding the property?

"Recent support from Sen. Orrin Hatch (R-Utah) to scale back tax deductions for home loan interest payments drew positive feedback from at least a couple of interested observers May 13, though not from the housing industry.
Hatch, speaking May 11 at the American Bar Association Section of Taxation 2013 May meeting, said it is “likely” the mortgage interest deduction would be limited to a first home on “anything below $500,000” if tax reform legislation were enacted. Current law allows homeowners to deduct interest paid on mortgages for both first and second homes up to $1 million in mortgage debt, plus the interest on an additional $100,000 of debt through home equity lines of credit.
Lawmakers in the Senate and House are considering a number of different options to overhaul the tax code, and Hatch is working with his colleagues to examine elements such as tax expenditures, including the mortgage interest deduction, to improve efficiency and competitiveness for households and businesses."

tomsang

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Re: Sounds like the mortgage interest deduction may be changing...
« Reply #1 on: May 14, 2013, 10:13:21 AM »
A mortgage for a rental is a business expense.  There has been no discussion about limiting or eliminating the mortgage expense for rentals.  If they go down that path, then they would have to eliminate other loans for businesses.  If a business buys a building with a loan, would they limit or eliminate the interest deduction.  I highly doubt it as capitalism wants money to be deployed in the most productive manner. 

Also the home mortgage deduction has been discussed for the past decade or so as it one of the largest costs to our federal budget.  It would most likely be the death of the GOP if they push to eliminate it as a large portion of the population owns homes, wants to own homes or is employed in some way related to homeownership.  There are some of the largest lobbyist involved in all of these sectors.  Mortgage, realtors, home supplies, builders, etc.  They would piss off a huge percent of the population.  Limiting the deduction to the first $1million of personal residence is something that many could fathom, of course the GOP elite will be pissed, but the commoners can agree that this fair as it does not affect them.

FlorenceMcGillicutty

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Re: Sounds like the mortgage interest deduction may be changing...
« Reply #2 on: May 14, 2013, 10:24:05 AM »
Ah, got it. Thanks for the clarification. When I read that they would eliminate the deduction for 2nd homes, I read "rental properties." But I guess that's for 2nd homes that don't provide income.

I live in a high cost of living area so the $500k limit would affect my neighborhood. I'd be ok with it personally but I wonder if it would dampen sales. I'm sure it would.

To clarify, the law already limits the deduction to $1million. This would lower it to $500k.

The_Dude

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Re: Sounds like the mortgage interest deduction may be changing...
« Reply #3 on: May 14, 2013, 10:29:08 AM »
It the top Republican on Senate Finance says it's going to happen, chances are it will--at least in some form. I don't have a rental property, but for those who do (or who are thinking of buying one), if you couldn't deduct the mortgage, would it change your behavior regarding the property?

As tomsang points out the mortgage deduction if a personal deduction which has nothing to do with rental property unless you are incorrectly filling out your taxes.

Limiting the deduction to the first $1million of personal residence is something that many could fathom, of course the GOP elite will be pissed, but the commoners can agree that this fair as it does not affect them.

The deduction is currently limited to $1M already.  The proposal is to further scale it down from the current $1M to $500k, so basically the wealthy and those that live along the coastal regions would be impacted the most.

As a fiscal conservative I'm all for just getting rid of the deduction all together. 

Johnny Aloha

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Re: Sounds like the mortgage interest deduction may be changing...
« Reply #4 on: May 14, 2013, 11:17:12 AM »
The housing industry - especially the NAR (National Association of Realtors) - have a VERY strong lobby.  So I wouldn't bet on any movement. 

mpbaker22

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Re: Sounds like the mortgage interest deduction may be changing...
« Reply #5 on: May 14, 2013, 11:24:09 AM »
Yep, the only reason this thing exists is because it created some job for realtors.  Similar to how our tax code will never be less complicated because accountants actually lobby for a harder to understand code.
It creates jobs, but why is that the goal?

It's a silly deduction, and it will probably be around forever.

Hamster

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Re: Sounds like the mortgage interest deduction may be changing...
« Reply #6 on: May 14, 2013, 12:38:13 PM »
Yep, the only reason this thing exists is because it created some job for realtors...
It's a silly deduction, and it will probably be around forever.
I agree that the tax deduction is silly, and should be phased out and then eliminated. It is essentially a government subsidy to the housing industry and a regressive tax policy with the benefits going to the wealthy and those in expensive housing markets. In the short term eliminating the deduction would destabilize prices, particularly on more expensive homes.

That said, the deduction was not created to give realtors jobs. This article gives the history.

Dating back to 1913 (actually to the first modern income tax in 1894 which was declared unconstitutional), ALL personal loan interest (including consumer credit card interest!!!!) was deductible from income tax. In 1986, most of the interest deductions were eliminated, creating the specific deductions for primary and secondary residences.

As others have said, there are powerful interests in favor of keeping the deduction.

smedleyb

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Re: Sounds like the mortgage interest deduction may be changing...
« Reply #7 on: May 14, 2013, 04:16:30 PM »
Just what a fragile housing recovery needs, more taxes on real estate.  From a Republican, no less.

God I love Washington.

tooqk4u22

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Re: Sounds like the mortgage interest deduction may be changing...
« Reply #8 on: May 14, 2013, 06:07:32 PM »
It is not that meaningful as about 2/3rds of tax returns use the standard deduction and there is already cap so it probably wouldn't hurt housing that much and if it did it would be temporary but any additional tax revenue would be insignificant - the feds low rate manipulation is far more of an issue when it stops. 

On the other the deduction is fair as renters essentially get the same treatment because mortgage interest is deductible for landlords and thus lowers the cost to the tenant. 

Self-employed-swami

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Re: Sounds like the mortgage interest deduction may be changing...
« Reply #9 on: May 14, 2013, 06:27:46 PM »
Mortgage interest on owner occupied primary residences hasn't been tax deductible in Canada, and our housing market is healthy.  I'm sure there would be an adjustment period, but it isn't going to kill the housing market in the US, if they change it.

I'm not sure when owning a house, became a right, as opposed to a privilege.  If you need to deduct your mortgage interest to be able to afford your mortgage, you likely shouldn't have one to begin with. 

Waits for the flaming to start

grantmeaname

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Re: Sounds like the mortgage interest deduction may be changing...
« Reply #10 on: May 15, 2013, 07:58:09 AM »
I'm not sure when owning a house, became a right, as opposed to a privilege.
What does that have to do with the tax code?

tooqk4u22

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Re: Sounds like the mortgage interest deduction may be changing...
« Reply #11 on: May 15, 2013, 08:11:19 AM »
Mortgage interest on owner occupied primary residences hasn't been tax deductible in Canada, and our housing market is healthy. 

The two are not related, and don't be so sure your housing market is healthy.....do a quick search and you will see that Canada is largely viewed to be in bubble territory and one of the most overvalued in the world and canadians debt to income is at all time highs.  So signs are flashing red.....it doesn't mean a crash is coming but it will pause and probably slightly decline as the CAD govt tightens lending requirements.

mpbaker22

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Re: Sounds like the mortgage interest deduction may be changing...
« Reply #12 on: May 15, 2013, 09:05:22 AM »
That said, the deduction was not created to give realtors jobs. This article gives the history.

Yes, the tax code also wasn't invented to create jobs.  But it hasn't been shortened because of the jobs that would be lost.  That was my point, not that it was created in order to create jobs.  It never works like that because it would be too insane to ever pass.

Self-employed-swami

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Re: Sounds like the mortgage interest deduction may be changing...
« Reply #13 on: May 15, 2013, 09:26:11 AM »
I'm not sure when owning a house, became a right, as opposed to a privilege.
What does that have to do with the tax code?

The tax code is designed to encourage people to make decisions, inline with the government's values, which seem to include almost every citizen being a home owner.  The way that the US banking institutions were giving mortgages to anyone who had a warm breath, further indicated it.

Self-employed-swami

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Re: Sounds like the mortgage interest deduction may be changing...
« Reply #14 on: May 15, 2013, 09:30:41 AM »
Mortgage interest on owner occupied primary residences hasn't been tax deductible in Canada, and our housing market is healthy. 

The two are not related, and don't be so sure your housing market is healthy.....do a quick search and you will see that Canada is largely viewed to be in bubble territory and one of the most overvalued in the world and canadians debt to income is at all time highs.  So signs are flashing red.....it doesn't mean a crash is coming but it will pause and probably slightly decline as the CAD govt tightens lending requirements.

I can make a profit from my house appreciating, or I can make a lot of profit from housing declining.  Either way, I don't really care.  I won't be trying to sell my home anytime soon.

Our housing market is predicted to experience a moderate correction by some (15%) or to continue to appreciate at the rate of inflation, by others.

We have a much healthier housing market, in comparison to the US market.  I don't think that's really such a stretch, given the fact that we haven't experienced the housing crash you did. The mortgage rules have already been tightened, and they've done it gradually, which seems to have stabilized things somewhat.  They contemplated making people re-qualify for their mortgages, at renewal, but that has been dismissed, for now.

A big difference between Canadian and American mortgages, are the terms.  The interest is only fixed for a portion of the loan time (1,2,3,5,7,8,10 years depending on the mortgage option) and when that interest rate expires, you have to re-negotiate the interest rate.  We've never been able to just lock into a 30 year, fixed rate mortgage. 
« Last Edit: May 15, 2013, 09:37:33 AM by Self-employed-swami »

tooqk4u22

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Re: Sounds like the mortgage interest deduction may be changing...
« Reply #15 on: May 15, 2013, 10:53:28 AM »
We have a much healthier housing market, in comparison to the US market.  I don't think that's really such a stretch, given the fact that we haven't experienced the housing crash you did. The mortgage rules have already been tightened, and they've done it gradually, which seems to have stabilized things somewhat. 

By your logic, the US had an extremely healthy housing market in 2007.  Just because you didn't experience it doesn't mean you won't experience it, or will for that matter.

They contemplated making people re-qualify for their mortgages, at renewal, but that has been dismissed, for now.

So the government is kicking the can down the road to avoid a mess......where have I seen that before.

A big difference between Canadian and American mortgages, are the terms.  The interest is only fixed for a portion of the loan time (1,2,3,5,7,8,10 years depending on the mortgage option) and when that interest rate expires, you have to re-negotiate the interest rate.  We've never been able to just lock into a 30 year, fixed rate mortgage.

This actually imparts more risk into your housing market as all of the loans are less than 10 years so if rates rise, values fall, or other macro/micro event everyone is succeptible to refinance risk.  True there are other loan options available in the US with shorter terms and variable rates, but the 30 year mortgage provides long term certainty of payment.   More than half of all mortgages in CAD are done with a term of five years or less - in the US those are basically considered ARMs.

So whether or not you plan on buying or selling - if you have no mortgage then who cares, and if you have a mortgage you are succeptible to rate reset (what would a 2-3% increase in rate do to your payments) but if you can afford it who cares, all that does not dismiss that the CAD housing market is uncharted territory and contains far more risk than conservative canadians like to admit, especially after they and their banks thumped their chests and told the rest of the world how smart and conservative they were.  Stop trusting your politicians and CAD pride and study the statistics - they are all very similar to the US in 2007. 




Self-employed-swami

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Re: Sounds like the mortgage interest deduction may be changing...
« Reply #16 on: May 15, 2013, 11:26:35 AM »
If my interest rate went up 3%, my payments would go to $171/week, hardly soul-crushing, considering that is including a bonus 40% prepayment every week.

However, I agree, our mortgage system is more volatile than the US market.  Given that, and our tougher lending laws, I think our mortgage system is less likely to implode than yours is.  Will we see a correction, I think we will in some markets, but I'm not expecting a meltdown like the US market. 

I bought my house with 64% down, and if we use the latest city tax assessment, I have 16.8% loan to value. 

0-down mortgages are gone, and I think it has also become very hard to get a 5% down mortgage.  CMHC insures all non-conventional mortgages (less than 20% down), and I don't think you guys had that in the US, but I might be wrong.

Self-employed-swami

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Re: Sounds like the mortgage interest deduction may be changing...
« Reply #17 on: May 15, 2013, 11:28:54 AM »
So whether or not you plan on buying or selling - if you have no mortgage then who cares, and if you have a mortgage you are succeptible to rate reset (what would a 2-3% increase in rate do to your payments) but if you can afford it who cares, all that does not dismiss that the CAD housing market is uncharted territory and contains far more risk than conservative canadians like to admit, especially after they and their banks thumped their chests and told the rest of the world how smart and conservative they were.  Stop trusting your politicians and CAD pride and study the statistics - they are all very similar to the US in 2007.

I'm not claiming that some people aren't going to be up shit creek without a paddle, when rates return to a more normal rate (5-7%), but we've got more regulation in place now, than we did in 2007, and much more, than you did in 2007, so hopefully we've learned enough to not follow you down the crapper.

grantmeaname

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Re: Sounds like the mortgage interest deduction may be changing...
« Reply #18 on: May 15, 2013, 11:51:49 AM »
The tax code is designed to encourage people to make decisions, inline with the government's values, which seem to include almost every citizen being a home owner.  The way that the US banking institutions were giving mortgages to anyone who had a warm breath, further indicated it.
Okay, but what do banks have to do with rights? Obviously homeownership is something many Americans value, and for good reason, but I don't see how you're making the jump from that to it being a right unless it was empty hyperbole.

CMHC insures all non-conventional mortgages (less than 20% down), and I don't think you guys had that in the US, but I might be wrong.
Yeah, we've got that. And I wouldn't be so sure that government sponsored enterprises are safe and rock-steady, either.
« Last Edit: May 15, 2013, 11:55:01 AM by grantmeaname »

tooqk4u22

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Re: Sounds like the mortgage interest deduction may be changing...
« Reply #19 on: May 15, 2013, 02:21:33 PM »
If my interest rate went up 3%, my payments would go to $171/week, hardly soul-crushing, considering that is including a bonus 40% prepayment every week.

I may be a bit presumptious but my guess is that you don't account for much of the Canadian economy and probably aren't representative of the typical canadian financial profile, just as I wasn't when the US economy got whacked.

Also here is a piece that suggests CAD banks did get a form of bailout during the crisis.  http://www.policyalternatives.ca/sites/default/files/uploads/publications/National%20Office/2012/04/Big%20Banks%20Big%20Secret.pdf

Also, if CAD economy is way overexposed to banks and what they do.....mortgages primarily. http://canadianmarketreview.com/2013/05/08/bank-assets-as-a-percentage-of-gdp/

And the CAD banks have far more leverage/less tangible common equity than even the US - i.e. more risk.

All this and as noted above consumers debt to income has skyrocketed......not sure where CAD goes from here, thank goodness they have natural resources.  Point is if any of this unwinds even a little bit you will see the CAD $ decline relative to the US $ and that will create more issues.
« Last Edit: May 15, 2013, 02:30:29 PM by tooqk4u22 »

Self-employed-swami

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Re: Sounds like the mortgage interest deduction may be changing...
« Reply #20 on: May 16, 2013, 10:07:50 AM »
I'm aware that I'm not the typical Canadian homeowner, in having a very small mortgage (I think I still owe 17% of the value of my home) and I have no consumer debt, just some leveraged investments, and my husband has a few student loans left.

I wasn't trying to say that Canada's system is superior to the US, but just that getting rid of the mortgage interest deduction isn't likely going to cripple the housing market, as we haven't ever had one here, and many people still buy homes.

And I was using the homeownership as a right comment, as an exaggerated hyperbole.  I guess my sense of humour doesn't come across well, in the written word :)

Our government has been trying to encourage people to save more money (Tax Free Savings Accounts for example), but I think it't a bit like leading a horse to water...
« Last Edit: May 16, 2013, 10:10:34 AM by Self-employed-swami »