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The interest deduction is a holdover from a time when all interest used to be deductible. The demise of interest deductibility doesn't seem to have stopped Americans from taking on non-deductible debt.
The argument against taking away the deductibility of property is fairly simple. Currently I have rental properties. Take away the deductibility as an individual and I'll instead need to form a company to put the assets into and then be able to deduct the interest. The net losers would be those without enough property to afford the expense of forming a company, which would in effect discourage private home ownership.
"Large single family homes — defined as the largest 25 percent of all listings on realtor.com and about 2,900 square feet to 4,000 square feet — receive 12 percent to 45 percent less views on realtor.com than the typical home in each market."
"demand and prices for large ranch houses like his have declined over the last decade, as more young professionals move to smaller abodes in hipper areas. He doesn't expect that to change anytime soon."
"Younger and older generations alike are gravitating toward smaller dwellings in more urban, walkable suburbs and cities, with restaurants and coffee shops around the corner. It's leading to a real estate traffic jam: Increasingly, boomers are getting stuck, because most can't buy the home of their dreams until they unload their current ones. And many millennials have neither the desire nor the means to help them out."
As to the mortgage deduction, since the new tax law (if passed) only limits the amount to $10,000 annually it may not have a huge impact by itself. Coupled with the elimination of SALT though, it may have a significant impact on your tax bill if you live in a high property tax state and have a big mortgage. Many people will not have enough deductions to itemize. If you have $10,000 in property tax in the 28% bracket that deduction is worth $2800 annually, plus whatever you cannot claim on mortgage interest. This may not matter to the very wealthy, but may impact those on the margins.
Will this all put downward pressure on housing prices? It comes down to affordability. I suspect that in an indirect fashion people will be inclined to purchase less expensive homes and many folks (Gen X and older) may be in for a surprise when the try to sell. I know a lot of folks who spent 15-20 years in their homes and after taking into consideration maintenance and upgrades will not come close to break even, especially after subtracting the cost of selling and moving. Add in 15 years of property taxes and the situation can be even more bleak.
Is there an artificial inflation of house price because of the deduction allowance for mortgage interest?
I have read that construction cost is down and is one reason why huge McMansions are being built. If the deduction goes away would it bring real estate prices down? isn't that better in final analysis that demand will pick up, and more medium size houses in mid range price, which are now in short supply, will be built?
People who can afford housing will buy a home . The increase on costs if there is no deduction is no worse than having higher interest rates.
Our best home appreciation has always been in the 6-7% range. Even 2006-2007 saw 6-7% mortgages.
Many home owners have homes that are paid off or paid cash and are on the amt tax system anyway. Others can not itemize regardless.
It is all local markets that will determine value at the end of the day
The interest deduction is a holdover from a time when all interest used to be deductible. The demise of interest deductibility doesn't seem to have stopped Americans from taking on non-deductible debt.
The argument against taking away the deductibility of property is fairly simple. Currently I have rental properties. Take away the deductibility as an individual and I'll instead need to form a company to put the assets into and then be able to deduct the interest. The net losers would be those without enough property to afford the expense of forming a company, which would in effect discourage private home ownership.
No need to 'form a company' just file it on a Schedule E.
No need to 'form a company' just file it on a Schedule E.
I agree, I'm just saying if the government were to try and limit interest deductibility for individuals, it could be bypassed by forming a company....so there's really no point in the government looking for money there.
"Large single family homes — defined as the largest 25 percent of all listings on realtor.com and about 2,900 square feet to 4,000 square feet — receive 12 percent to 45 percent less views on realtor.com than the typical home in each market."
"demand and prices for large ranch houses like his have declined over the last decade, as more young professionals move to smaller abodes in hipper areas. He doesn't expect that to change anytime soon."
"Younger and older generations alike are gravitating toward smaller dwellings in more urban, walkable suburbs and cities, with restaurants and coffee shops around the corner. It's leading to a real estate traffic jam: Increasingly, boomers are getting stuck, because most can't buy the home of their dreams until they unload their current ones. And many millennials have neither the desire nor the means to help them out."
As to the mortgage deduction, since the new tax law (if passed) only limits the amount to $10,000 annually it may not have a huge impact by itself. Coupled with the elimination of SALT though, it may have a significant impact on your tax bill if you live in a high property tax state and have a big mortgage. Many people will not have enough deductions to itemize. If you have $10,000 in property tax in the 28% bracket that deduction is worth $2800 annually, plus whatever you cannot claim on mortgage interest. This may not matter to the very wealthy, but may impact those on the margins.
Will this all put downward pressure on housing prices? It comes down to affordability. I suspect that in an indirect fashion people will be inclined to purchase less expensive homes and many folks (Gen X and older) may be in for a surprise when the try to sell. I know a lot of folks who spent 15-20 years in their homes and after taking into consideration maintenance and upgrades will not come close to break even, especially after subtracting the cost of selling and moving. Add in 15 years of property taxes and the situation can be even more bleak.
McMansions are not 2,900-4,000 sf, those are considered normal family tract homes, and here are selling fast whether new or existing. Ours is 3,000 sf built in 1980, and now worth about $500k more than we paid for it 24 years ago. Remember that when you rent you are still paying property tax and maintenance, it's just buried in the rent. The landlords are not paying it out of their own pockets just to be nice. Regardless of what we spent on taxes and maintenance in that time, we pay for it as we go along so really the same as the renter, but with a big check to us when we move.
Currently somewhere around d half of mortgage holders do not itemize therefore currently half of mortgage holders do not derive a direct benefit from the mortgage interest deduction. If you raise the standard deduction even while eliminating the personal exemption it is possible and even likely that even more mortgage holders will no longer itemize meaning even less people would have a direct benefit. The MID benefits disproportionately go to the higher end of the income scale where people can afford to pay higher interest/taxes and other items that can be used when itemizing. I think the overall impact would be minor but I can't blame the real estate industry for lobbying against it because a whole lot of people believe they get a benefit out of owning that they either do not at all or the benefit is much lower then what they think it is
Does the deduction of mortgage interest keep house prices high?
In a word... yes.
Monthly & annual household budgets (too often) count on getting that money back.
Without it (and the other property related deductions) their "affordability" is lower.
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If the deduction goes away would it bring real estate prices down?
Probably.
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isn't that better...?
Eventually.
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Originally Posted by Lowexpectations
Currently somewhere around d half of mortgage holders do not itemize
therefore currently half of mortgage holders do not derive a direct benefit from the mortgage interest deduction.
Do a demographic breakdown on which half is NOT itemizing.
I'm pretty sure it will mostly be retirees not young families.
In a word... yes.
Monthly & annual household budgets (too often) count on getting that money back.
Without it (and the other property related deductions) their "affordability" is lower.
Probably.
Eventually.
Do a demographic breakdown on which half is NOT itemizing.
I'm pretty sure it will mostly be retirees not young families.
The breakdown usually follows income more than anything else
The breakdown usually follows income more than anything else
Higher income people will not care or have other means to deduct the interest expense such as incorporating. So those prices may not be affected.
Young middle class families will have lesser to spend and their demand will bring prices down in those markets.
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