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What will become of the mortgage interest deduction

What will become of the mortgage interest deduction

There’s a lot of discussion about the mortgage interest deduction, typically regarded as a big incentive for homeownership. As the IRS code stands, taxpayers who itemize deductions can include the accrued interest on debts secured by a principal residence or second home up to $1 million or the first $100,000 of a home equity loan. Additionally, taxpayers avoid capital gains tax on the sale of real estate property (up to $250,000 for single filers and up to $500,000 for a married couple filing jointly) used as the primary residence for at least two of the five years before the date of sale.

Reuters asked homeowners to weigh in on the debate — should the U.S. government keep, alter, or altogether scrap the home mortgage interest deduction? Those who oppose the deduction say that it’s too costly to maintain. Doing away with it could lower federal tax rates by 8 percent, suggests Dean Stansel, adjunct fellow at the Reason Foundation, who argues that most taxpayers making under $100,000 would benefit from tax cuts in place of the mortgage deduction. The Reason Foundation purports that the deduction “subsidizes and rewards wealthy people for buying expensive houses they would’ve purchased anyway.” In 2009, the mortgage interest deduction was claimed on about 25% of all tax returns, and 73% of those returns were filed by households making over $200,000.

On the flip side, proponents argue that the deduction incentivizes and raises rates of homeownership. According to the Joint Committee on Taxation, middle-income families (making between $50,000 and $75,000) save an average of $1,227 from the deduction. High-income households (making above $200,000) save $6,650. To change the code at this stage in the game would feel like a “bait and switch.” Economists agree that the issues are complex, and that the timing of instituting any changes is critical.