Mortgage Deduction Proposal To Make Seniors Downsize Or Rent Sooner?

Tax reform is a bitter pill to swallow for all Americans but as the nation digests some of the proposals from the release of a portion of the National Commission on Fiscal Responsibility and Reform’s report, one aspect of the report focuses on a core component in homeownership:  the mortgage interest tax deduction.  The Commission’s focus on tax reform has proposed scaling back the deduction to 80% of its current level and outlines the possibility of excluding the deduction on second residences, home equity loans and mortgage loans over $500,000.  Estimates on the impact of the mortgage interest deductibility in its current form show that it will cost the US taxpayer $131 billion in 2012.

Lawmakers will need to consider that any changes to the mortgage interest deduction will have a substantial effect on homeownership besides the budgetary impact as any action amy result in delaying any recovery in home price appreciation.  With any kind of proposed reduction in the benefits from the mortgage interest deduction, seniors who are living in ‘McMansions’ may downsize to smaller homes or make the move to rental housing if the owner-occupancy subsidy is modified or removed. 

Many tax reform advocates and deficit hawks have brought up the mortgage interest deduction in the past but with the current deficits and fiscal crisis, they may finally have a more receptive audience on proposed reform.  The real estate and home building industries are quick to downplay discussions of the elimination of the interest deduction regardless of the fiscal environment.

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"Tampering with the deduction would be a major setback for today’s slowly emerging housing recovery. It would disrupt the plans of young households who are gathering their financial resources to purchase a home. And it would impose a substantial tax burden on existing home owners, many of whom continue to stay current with their mortgage payments even as they struggle to make ends meet. Diminishing or ending the deduction would exert further downward pressure on home prices, leaving more home owners with mortgages larger than the value of their property and fueling even more foreclosures," said Bob Jones, chairman of the National Association of Home Builders (NAHB) in a statement after the release of the proposal.