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The interest on home mortgages is typically tax deductible. If one itemizes one’s deductions, this deduction would appear on Schedule A of Form 1040. Besides interest on home mortgages there are many items that are typically tax deductible such as property taxes, state and local income taxes, charitable deductions, and tax return preparation fees. Interest on a new car loan is not tax deductible. Why is the home mortgage interest deductible and not the car loan interest?
Back in the 80s when income tax rates were cut the deductability of car loans was axed. Horse trading or perhaps an acknowledgment that buying depreciating assets was not something that tax policy should encourage. There are those thing claim (probably correctly) that mortgage deductability should be lowered or perhaps even eliminated, given the sickly state of home sales of late I doubt there is much chance that will go anywhere soon...
Yes to encourage homeownership.Also rememebr that taxapyers as voters control alot of what is dedcutable and hmeowners are second only to social security as a don't touch item in this country.
Location: Sometimes Maryland, sometimes NoVA. Depends on the day of the week
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One reason, as I understand it, that it use to be that ALL interest was tax deductible was that it was taxed twice otherwise. I.e. you pay it from after tax income and the person you pay it to pays taxes on receiving it. But yeah, our tax code is used as a way to encourage certain things seen as good for society: home ownership, children, etc
The "encourages home owership" argument is based on bad economic theory. Without the deduction, the price of homes would be lower by the amount of the benefit it provides to the homeowner. Home buyers are payment buyers. The real beneficiary is the mortgage lenders since the deduction encourages loans over cash purchases.
Used to be all interest even on credit cards was deductible. The Govt needed your money so they eliminated that deduction except left the one on homes since it hit just about everyone and buying homes is a big factor in the economy.
LOTS of "bad economic theories" work REALLY WELL...
Quote:
Originally Posted by CAVA1990
The "encourages home owership" argument is based on bad economic theory. Without the deduction, the price of homes would be lower by the amount of the benefit it provides to the homeowner. Home buyers are payment buyers. The real beneficiary is the mortgage lenders since the deduction encourages loans over cash purchases.
Theory says the stock splits are pointless, but experience says they generally encourage the behavior management is looking for -- great total shareholder value.
Similarly I believe that the practical effect of reducing or eliminating deductions for mortgages would not be very undesirable. Fewer people would want to buy homes, less capital would be available in the overall economy and there would a less dynamism in many areas related to finance.
I don't want to test any of those things empirically... Would you?
The "encourages home owership" argument is based on bad economic theory. Without the deduction, the price of homes would be lower by the amount of the benefit it provides to the homeowner. Home buyers are payment buyers. The real beneficiary is the mortgage lenders since the deduction encourages loans over cash purchases.
Problem is very few people historically could pay cash for a home.
Buying a home is a small part of home ownership. Buying washers, dryers, hammers, paint ect is the big impact to the economy.
Corporates don't pay tax on interest. The same rule on all interest applied to individuals since 1920s. But the government took away this deductibility on all interest expenses except for mortgage interest.
Once in a while, you will see news article about government getting rid of mortgage interest deductibility. It can happen but not likely.
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