The NAR building and the U.S. Capitol in the b...

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There is a lot of discussion in the real estate world about the Mortgage Interest Deduction (MID) on Income Taxes.  The National Association of REALTORS® (NAR) is virtually flipping out with just the thought that it could be eliminated by Congress as they look for more “revenue enhancements” (they are unwilling to say “tax increases”).

The NAR position is that with a weak housing market, and the fact that homeowners have benefited form the MID for decades, this is NOT the time to eliminate it, increasing taxes on mostly middle class taxpayers/homeowners.  I can’t argue against that position very forcefully.  It isn’t that I want to agree with the NAR, because I don’t.  And, in fact, my reasoning is much different from theirs.

Opponents of the MID argue that homeowners shouldn’t get special treatment v. renters in getting a tax credit for a portion of their mortgage.  And that IS  a strong argument, but there is one HUGE flaw…

Renters might not get a tax credit, but Landlords DO.  They may or may not pass that savings along to the renter (depending on the competitiveness of their rental market), but as a business, interest is a deductible interest expense.  So, in effect, a homeowner would be penalized for occupying a home that they own.  And with all of the talk of “fairness” coming out of Washington, DC, taxing the Mortgage Interest for Owner/Occupants, while not taxing it for investors seems kind of dumb. 

Also, this would be going after the heart of the middle class.  Many opponents argue that upper middle class families benefit more from the MID than those with lower incomes… although, the truth is that income isn’t as much of a determinant as is mortgage debt.  BUT, those with higher incomes might have a tool available that those with lower incomes may not.  Many are already business owners.  And, it wouldn’t be that tough for them to incorporate, transfer the ownership of their home to their business, and rent the house. 

This would give them the tax deduction for the mortgage interest as a business expense.  Homeowners with smaller mortgages and/or smaller incomes might not be able to swing the same deal… meaning that they would be more adversely impacted by the change than higher income and/or higher debt homeowners. 

One other thing, which I personally think is important, but a back burner aspect of the debate, is the benefit of a home-ownership society.  Simply put, home owners are a more stable group than renters.  They have a stake in their neighborhoods, schools and communities.  Renters want nice neighborhoods, schools and communities, but have a much easier time escaping if things go sour.  They won’t pay a financial penalty for getting out… in fact, if demand increases for a specific area, they might actually end up having to pay more.

BTW, I DO consider business deduction of interest to be something that should NOT be taxed.  It is a legitimate business expense.  And since I don’t think businesses should have to pay taxes on the interest THEY pay, I don’t think it would be right to force owner/occupants to pay interest for the exact same thing.

What do YOU think?  I’d love to hear your thoughts.  Add a comment.

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