What if they reduced a tax deduction hardly anybody gets? If you’re the the National Association of Realtors and you’ve been spinning lies for decades about mortgage interest deductibility, your whole make-believe world just collapsed…

by Greg Swann

Suburban Phoenix Real Estate Broker

Author website

Kicking this back to the top. It’s news again. I wrote this post more than a year ago, but, per The Hill, the tax-deductibility of mortgage interest is back on the table:

The popular tax break for mortgage interest, once considered untouchable, is falling under the scrutiny of policymakers and economic experts seeking ways to close huge deficits.

Although Congress last year rejected the White House’s proposed cut to the amount wealthier taxpayers can deduct for home mortgage interest payments, the administration included it again in its 2010 budget — saying it could save $208 billion over the next decade.

And now that sentiment has turned against all the federal red ink — and cost-cutting is in vogue — Democrats on President Barack Obama’s financial commission are considering the wisdom of permanent tax breaks such as the mortgage deduction and corporate deferral. Calling them “tax entitlements,” senior Democratic lawmakers have argued they should be on the table for reform just like traditional entitlement programs Medicare, Social Security and Medicaid.

Nothing has changed in my response to this news, so let’s dial the wayback machine back to February 26, 2009:

    The bay-trees in our country are all wither’d
    And meteors fright the fixed stars of heaven;
    The pale-faced moon looks bloody on the earth
    And lean-look’d prophets whisper fearful change;
    Rich men look sad and ruffians dance and leap,
    The one in fear to lose what they enjoy,
    The other to enjoy by rage and war:
    These signs forerun the death or fall of kings.
        — William Shakespeare, Richard II

I was out showing this afternoon and came home to find that President Barrack Obama has proposed giving the NAR’s cherished mortgage income tax deduction a very small haircut. From The Wall Street Journal:

The tax increases would raise an estimated $318 billion over 10 years by reducing the value of such longstanding deductions as mortgage interest and charitable contributions for people in the highest tax brackets. Households paying income taxes at the 33% and 35% rates can currently claim deductions at those rates. Under the Obama proposal, they could deduct only 28% of the value of those payments.

The changes would be phased in gradually over the next few years. For the 2009 tax year, the 33% tax bracket starts with couples with taxable earnings of $208,850, when adjusted for personal exemptions and various deductible expenses. A taxpayer in the top bracket paying $1,000 of mortgage interest, for example, would see a tax break worth $350 reduced to $280.

Did you catch that? Top brackets. Seventy bucks.

Nevertheless, the National Association of Realtors has gone predictably ballistic:

In a letter sent today to President Obama, NAR President Charles McMillan said, “There is never a good time to propose something that undermines the basic foundation of homeownership, but given our current housing crisis, this has to be the worst possible time.”

Any changes to the current mortgage deduction would have repercussions far beyond the homeowners directly impacted. “The tax deduction of interest paid on mortgages is both a powerful incentive for homeownership and one of the simplest provisions in the tax code. It should not be targeted for change,” McMillan said.

Here’s the funny part of the story: Hardly anyone gets any benefit from mortgage interest deductibility. From Portfolio.com:

[M]ost homeowners don’t get any benefit from the tax deduction at all.

I first boned up on tax deductions back in 2004, when George W Bush was thinking about abolishing them. Basically, there’s a standard deduction, which everybody gets; if you’d rather, however, you can opt to itemize a bunch of separate deductions instead, if they add up to more than the standard deduction.

The standard deduction in 2009 for a married couple filing jointly is $11,400. That means you get to subtract $11,400 from your income even if you don’t pay any mortgage interest at all. Now suppose that married couple bought a home for $200,000, put 20% down, and got a 6% mortgage. Then their annual interest payments are 6% of $180,000, or $10,800. They own your own home, but they get no benefit from the tax deduction: they’re still better off taking the standard deduction.

Of course, if you own a home in Washington DC or in New York, you’re likely to have a mortgage of much more than $180,000. But let’s say that our married couple bought a $350,000 house instead, and have annual mortgage interest payments of $16,800. Then their taxable income will be reduced by $5,400 as a result of the mortgage-interest tax deduction, which means that their taxes will be reduced by about $1,900, or about $150 a month — compared to $1,400 in mortgage interest payments. By contrast, refinancing from a 6% mortgage into a 4.5% mortgage will save them $350 in mortgage interest payments: movements in interest rates are much more important to homeowners than tax laws are.

Want to go one better? The idea of mortgage interest deductibility is the key argument in the almost-always bogus rent vs. buy debate. Putative deductibility provides supposed cash benefits right now — and it promotes the investment value of your home.

Sit still for a moment. Take a few deep breaths. Forget everything about our current political and economic context and then tell me in twenty-five words or fewer why relatively fungible non-commercial real estate should ever be thought of as an investment. Do you think of your clothing as an investment? Do you anticipate a big cash payday for your knocked-around production-line mini-van?

We’ve been stupid for a long, long time, but not without cause. The NAR has told us for decades that we get a mortgage interest deduction, even though almost nobody does. They told us it was worth serious dough, even though it wasn’t. And they told us it turned our homes into investments, even though treating our homes as investments has resulted in massive over-building, massive over-lending, massive defaults, massive foreclosures and a massive clusterfrolic in the residential real estate business.

Who is at fault? Who claims credit for the idea of mortgage interest deductibility? The National Association of Realtors.

Two paragraphs ago you were thinking about reality and not just the news, so let’s try to make a habit of it. Suppose the car dealers in your state passed a law that put an excise tax on every vehicle — owned, financed or leased. But they also passed a law that let the drivers of financed vehicles deduct their interest payments from their excise tax bill. If you bought your car on credit, you might stand up and shout, “It’s a great day to be a Rotarian Socialist!” But if you lease or own your car — or if you own a fleet of trucks — you might not be so happy.

A tax system like that is obviously unjust — and its underlying motivation should be equally obvious: To get more people to buy more cars more often than they otherwise would.

This is also the motivation behind the putative deductibility of mortgage interest. People who own their own homes free and clear are being robbed, as are people who rent, but not even the mortgagee is the true beneficiary. The law is written for the benefit of Realtors — and lenders — who can talk you into buying more house than you otherwise would, trading houses more often than you otherwise would, all with the promise of a tax deduction that you almost certainly will not get, and which won’t amount to anything even if you do.

And that is why the NAR must wail so balefully that the deduction of mortgage interest is sacred and must not be touched — because it’s a sleazy scam for churning the real estate markets, and, if anything changes, there’s a chance that someone might catch on to the con game.

Watch your email, Realtors. By Monday you’ll have note from McMillan entreating you to wail in chorus with the NAR, begging Obama and the Congress not to reveal our trade union for what it is: An anti-consumer criminal cartel.

The real test will be to see if Obama has the courage to stand up to the NAR. The proposed reduction in mortgage interest deductibility is trivial. It will impact almost no one. The best tax is no tax, and we will see nothing like that from this president. But even a slight reduction in a tax deduction that distorts the real estate market so dreadfully is a change for the good. An even greater good is containing the rapacious evil that the NAR has become.

At an absolute minimum, this should be fun to watch…

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