WATERLOO, Iowa — One of the most treasured assets of home ownership — the mortgage interest deduction — could disappear from the tax code as policymakers negotiate a plan to stop the U.S. from hurtling over the so-called “fiscal cliff.”
The idea has bankers, real estate brokers and builders concerned.
Under current tax law, individuals can deduct mortgage interest paid on mortgage debt of up to $1 million. The deduction is available for interest on mortgages for a principal residence and one additional residence.
The $1 million limitation represents the combined allowable debt on two residences. Mortgage interest on up to $100,000 of debt on home equity loans or lines of credit also qualifies for the deduction.
President Barack Obama’s deficit commission has proposed lowering the limit on mortgage principal eligible for a deduction to $500,000 from the current $1 million, removing any break for interest on a second home and turning the deduction into a tax credit capped at 12 percent of interest paid.
A tax credit would enable homeowners who don’t itemize their tax returns to deduct the interest from their tax bill. But while more taxpayers could take advantage of the benefit, a cap would mean those with large mortgages on expensive homes couldn’t get a credit for all the interest they pay.
Other proposals have called for similar changes.
The National Association of Realtors vocally opposes any changes in the current law, calling the deduction “a remarkably effective tool that facilitates homeownership.”
The association notes that, while no more than 35 percent of taxpayers in any given year itemize their deductions, more than three-quarters of homeowners use the deduction over the period they own their home.
The association says eliminating the tax break would cause a 15 percent decline in the value of homes across the U.S.
Lawmakers oppose changes
Lawmakers representing Cedar Valley homeowners say they oppose changing the law.
Rep. Bruce Braley, a Democrat representing Iowa’s 1st Congressional District, cited Internal Revenue Service data that showed 341,820 Iowans having claimed the mortgage interest deduction in 2010, out of a total of nearly 1.4 million tax returns filed in the state that year.
Braley said he opposes eliminating the law.
“Hundreds of thousands of middle class families in Iowa benefit from the tax savings provided by the home mortgage interest deduction and eliminating it entirely would amount to a big tax increase on thousand of middle-income Iowans,” he said.
Sen. Tom Harkin, D-Iowa, said he also opposes changing the law.
“Many modest and middle class homeowners have built the benefit of the mortgage deduction into their budget,” he said. “There are many places we can find revenue without hitting those homeowners.”
Jill Kozeny, spokeswoman for Sen. Charles Grassley, R-Iowa, said her boss says it’s doubtful any agreement would involve eliminating the cherished tax break, although “there could be some further limitations imposed.”
She said it’s unlikely any changes would occur in the near-term, if they occurred at all.
“Sen. Grassley doesn’t believe the mortgage deduction should be scuttled,” Kozeny said.
Real estate brokers are worried, said Bob Reisinger, executive vice president of the Waterloo-Cedar Falls Board of Realtors.
“There’s been speculation that it might deter the 20 to 25 percent that might be ready to buy,” he said.
Home shoppers in the upper price ranges likely would have more reason to be concerned, Reisinger said.
“For some reason, it appears that the upper income bracket is the one they’re after, and these are the people that would be most affected by the mortgage interest deduction going away.”
Reisinger stressed it was tough to predict how any changes might affect the real estate market.
“The national association and the state and local groups are all lobbying hard to keep it because the housing industry is really key to this economy turning around and coming back. It has supplied a lot of jobs.”
Losing the mortgage tax break doesn’t have to be a back-breaker for builders, said builder Craig Fairbanks, owner of Craig Fairbanks Homes in Waterloo.
“I think it will have an impact for some people but for customers we’re working with, I think most people will continue to do what they do,” he said. “It will have an effect.”
But, he said, he doesn’t think it’s a “major” issue.”
“For us, if you looked at the difference between whether somebody has an existing or new house, I don’t think it has an effect; you’d have it (a mortgage) on either one,” he said.
Casey McLaughlin, a broker with McLaughlin Investment Services in Waterloo, said changes in the tax break could hit “a high percent” of households.
“I just know it ‘s going to hit a very large percentage of population who are considered middle class,” he said. “There was talk you could also look at reduction of 20 percent of sales of homes. That’s one of the biggest catalysts for the economy is homebuilding.”
Losing the mortgage deduction would deliver a serious blow to a national housing industry at a bad time, McLaughlin said.
“It’s just now getting legs after the big meltdown of 2008,” he said. “It would hit middle income folks much harder than any of our politicians would admit.”
Upper-income earners will continue to buy, regardless, he said.
“Those kinds of things enter in to the decision of how big a house to buy,” he said. “To the upper, upper end, they’re going to do it whether they have the deduction or not, in some respects.”
Steve Tscherter, CEO of Lincoln Savings Bank, Reinbeck, said losing the mortgage interest deduction could send shock waves across the economy.
“There’s not going to be positive for owning a home in that regard,” he said. “It’s going to dampen sales. That’s what we need to lead us out of the recession.”