As you probably know, there are a lot of issues on the table in Washington that stand to affect homeowners as well as home-buying and -selling consumers. One such issue involves a growing debate over the future of the Mortgage Interest Deduction (MID).
Introduced along with the Income Tax in 1913, the MID allows homeowners who itemize their taxes to deduct mortgage interest attributable to their primary residence and second-home debt totaling $1 million, and interest paid on home equity debt up to $100,000. Though the MID is a popular tax deduction for millions of U.S. homeowners, it has become a controversial topic in recent years. Many feel that the MID helped contribute to the housing bubble in the mid-2000s.
Lawrence Yun, the chief economist for the National Association of REALTORSÂ® (NAR)â€”the largest professional association in the countryâ€”took part in a panel hosted by the Tax Policy Center, a joint venture of the Urban Institute and Brookings Institute, and the Reason Foundation. Held in Washington, D.C. this past July, the "Rethinking the Mortgage Interest Deduction" forum provided Yun with a platform to emphasize that any changes to the MID, now or in the future, could threaten the progress made in stabilizing the housing market, and potentially erode home prices and values.
â€œNAR firmly believes that the mortgage interest deduction is vital to the stability of the American housing market and economy,â€ said Yun during the forum. â€œThe MID facilitates homeownership by reducing the carrying costs of owning a home, and it makes a real difference to hard-working, middle-class families.â€
According to HouseLogic, having a tax deduction for mortgage interest makes owning a home more affordable because the deduction lowers the amount of tax you pay. U.S. Census data shows 37% of homeowners with mortgages spend more than 30% of their income for housing. Saving on these costs is critical for homeowners as it allows them to allot funds for savings and other expenses.
Therefore, while policy makers are considering eliminating the MID, Yun believes that such a move would lower the homeownership rate in the U.S.
â€œWhile we must ensure that the conditions that led to the artificially inflated homeownership rate of the bubble years do not resurface, we also need to create the conditions for sustainable homeownership,â€ he explained.
Reducing or eliminating the MID is a de facto tax increase on homeowners, who already pay 80-90% of U.S. federal income tax, said Yun, adding that that share could rise to 95% if the MID is eliminated.
Yun also asserted that itâ€™s a misconception that only the wealthy benefit from the MID, when in reality it benefits primarily middle- and lower income families. Almost two-thirds of those who claim the MID are middle-income earners and 91% of people who claim the MID earn less than $200,000 per year.
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