Mitt Romney may have lost the election, but his idea to cap deductions has won some support in Washington D.C., including from President Obama.
"I think that there are loopholes that can be closed, and we should look at how we can make the process of deductions, the filing process easier, simpler," the president said on Nov. 14 at his first post-election press conference.
The nonpartisan Tax Policy Center (TPC) estimates that capping tax deductions at $50,000 would raise $749 billion over 10 years, which is serious money even for the federal government. Given Republican opposition to raising tax rates, capping deductions may be key to any deal to resolve the fiscal cliff.
But the devil is in the details and the housing market particularly could be at risk if any cap applies to mortgage interest deductions. American households took $83 billion in mortgage interest deductions in 2010, The NYT reports, citing the Reason Foundation. That's very serious money to homeowners and limiting the cap on mortgage interest payments could put a serious crimp in the housing market's recovery.
"If you eliminate mortgage tax deductions you'd have a chilling effect on the market," says Rick Sharga, executive VP at Carrington Mortgage Holdings. It would be "one more disincentive, one more body blow to that already beaten up borrower."
The good news is almost no one, Sharga included, believes mortgage interest deductions would be eliminated. But like all deductions, "it's sitting there like a piñata at somebody's birthday party," he says. "It is tempting."
The real question, according to Sharga, is the dollar amount for deductions that's ultimately agreed upon. "Depending on how high the cap is, that's when I can answer the question: is it only going to effect a tiny amount of households?
Currently, the amount of mortgage debt eligible for reduction is capped at $1 million (that's the size of the mortgage, not the deduction). With the average new home selling for under $300,000 and the average existing home around $180,00, including condos and townhouses, reducing that to $500,000 would not impact the majority of U.S. homeowners.
Still, Sharga's "biggest fear" for the housing market in 2013 is the pressure on the "middle, move-up market" and many Americans in that category "are the people being targeted for tax increases."
If the Bush tax cuts are allowed to expire, the average U.S. family making between $75,000 and $100,000 a year would see their tax bill go up nearly $3,700 next year, The WSJ reports, citing TPC.
With state and local taxes on the rise, any additional hit in the form of capping mortgage interest deductions "might be the difference between somebody buying a house or deciding" they can't afford it, Sharga says.
Given the still-tenuous nature of the housing market's recovery, and its critical influence on consumer confidence and the economy broadly, politicians would be wise to tread very carefully.
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