Limit the home mortgage interest deduction … outrageous!

Not really … and, it might come up in tonite’s debate.

First, keep in mind that 2/3’s of tax filers take the standard deduction rather than itemizing deductions … so they’d be unaffected.

And, keep in mind the roughly 1/3 of folks rent the place they live … they don’t get a direct mortgage interest deduction … though, economists argue, they get an indirect deduction since their landlords get to deduct mortgage interest as a business expense. So, the playing field would be leveled for home owners and renters.

So, what about limiting the deduction for those folks who currently own a home and  itemize deductions?

Well, for openers, the home mortgage interest deduction is already limited … there’s already a  $1 million cap on the size of a family’s mortgages that qualify for the deduction … the cap is $500,000 for individuals filing separately.

Interest paid on second homes can be included in the deduction, subject to the caps.

Note that the deduction isn’t a direct cap on the amount of interest that can be deducted … it’s a cap on the size of the mortgage(s) … so, a max’ed out family with a $1,000,000 mortgage @ 6% gets to deduct $60,000 … a family with a $1 MM loan at 4% gets to deduct $40,000.

With that as background …

Tightening the limits on the home interest mortgage deduction would be a fairly simple thing to do …

Specifically, what I’d do if I were Mitt:  Slide the limit down to, say $500,000 – which is about double the median home value in the country … disallow mortgage interest on second homes … and do not raise the cap with inflation… that way, the nominal value of the deduction would stick around forever, but “real” value of the deduction would slowly vanish over time … without jolting the real estate market.


BTW: I’d get hammered by this change … but still, I think it would be a right thing to do.

P.S.  As I’ve said before, I’m also in favor of axing the deduction for state & local taxes … if states want to tax high and spend much, that’s their perogative … but, let residents of those states foot the bills … don’t lay off the cost to those of us living in fically responsible staes.  This change would fly politically for Romney since the high tax & spend states are blue ones that won’t vote for him any way … in most red states, Mitt’s proposed rate reductions would offset the loss of the deductions.

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