UnThreaded | Threaded | Whole Thread (35) | Ignore Thread Prev Thread | Next Thread
Author: yodaorange Big red star, 1000 posts Feste Award Nominee! Feste Award Winner! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 465377  
Subject: Value of mortgage deduction to homeownership Date: 7/21/2011 1:42 AM
Post New | Post Reply | Reply Later | Create Poll Report this Post | Recommend it!
Recommendations: 91
I see a lot of debate about the importance of being able to deduct mortgage interest related to homeownership. LEAVING THE POLITICS ASIDE, I wanted to understand what effect it would have in the nominal case. So I built a model with the following parameters:

Family of four (2 adults, 2 children)

Median family income $50,221 (Actual number from 2009 census for whole US)

Median home price $184,300 (From 7/20/11 National Association of Realtors report)

Fixed 30 year loan, assuming 3% down, like it is a FHA mortgage, 4.775%

2010 tax rates and deductions apply

No other itemized deductions for the family, other than mortgage interest

A few observations:

1) The median income family should NOT be purchasing the median house in the US. The housing to income ratio is too high at 3.67. My opinion is that this indicates some combination of too high house prices and/or too low family income. But for the time being, let’s ignore this and assume the family somehow gets the loan.

2) With ZERO itemized deductions, the family tax bill for 2010 was a REFUND of $4. This is because of two items: a $2,000 child tax credit and an $800 “Making Work Pay Credit.”

3) If you think it is NOT valid to count the $800 “Making Work Pay Credit”, then we can assume that goes away. This leaves the family federal income tax liability at $796.

4) The standard deduction for this family is $11,400. Until the sum of mortgage interest, real estate taxes, charitable contributions etc. exceeds that, there are ZERO tax savings.

5) The total first year interest payments on this loan are $8,476. So by itself, the mortgage interest deduction saves ZERO dollars of taxes for this family, any way you look at it within reason.

6) We all know that the interest payments go down as the loan ages, i.e. principal goes up. So it is pretty reasonable to assume the family will get ZERO financial savings from mortgage interest over the full 30 years of the loan.

7) If the family got some type of ARM, the starting interest rates are lower, which exacerbates the lack of tax savings.

8) BOTTOM LINE number 1 is that the median family buying the median home gets ZERO benefit from having mortgage interest deductible in today’s environment. If interest rates were to rise, then it might be produce a savings. But if that occurs, the family could only afford a less expensive house.

9) BOTTOM LINE number 2 is that the mortgage interest deduction is only worthwhile for higher income and higher mortgage cases. The mortgage deduction saves about $100 billion per year in income taxes, so clearly some folks are able to take advantage of it, they just are not in the bottom 50% of family incomes.

10) BOTTOM LINE number 3 is that mortgage rates are INFINITELY more important in housing affordability than the mortgage interest deductions. Some of us recall when mortgage rates were 10%+ plus back in the 1980’s. If the goal of Treasury and the fed is to encourage home ownership, they are doing exactly the right thing by forcing down interest rates. (Yes, I am going to leave out the unintended consequences of artificially low rates)

If anyone is interested, I will upload the hypothetical tax return.

Thanks,

Yodaorange
Post New | Post Reply | Reply Later | Create Poll Report this Post | Recommend it!
Print the post Back To Top
Author: yttire Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 366278 of 465377
Subject: Re: Value of mortgage deduction to homeownership Date: 7/21/2011 7:28 AM
Post New | Post Reply | Reply Later | Create Poll Report this Post | Recommend it!
Recommendations: 1
The deduction primarily helps out those with second houses, larger houses than you cited, or with other itemized expenses which push up their possible itemized deductions.

Print the post Back To Top
Author: patchdodd Big funky green star, 20000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 366279 of 465377
Subject: Re: Value of mortgage deduction to homeownership Date: 7/21/2011 7:31 AM
Post New | Post Reply | Reply Later | Create Poll Report this Post | Recommend it!
Recommendations: 26
8) BOTTOM LINE number 1 is that the median family buying the median home gets ZERO benefit from having mortgage interest deductible in today’s environment. If interest rates were to rise, then it might be produce a savings. But if that occurs, the family could only afford a less expensive house.



I appreciate your effort but I think that you are overlooking some very important issues.

The greatest benefit of the mortgage interest deduction may not be the deduction itself, but rather the ability to itemize. If your standard deduction is exactly offset by mortgage interest then there may be no net benefit, but now the taxpayer can also deduct contributions to her church and other charitable giving. She can deduct state and local taxes, property taxes, and certain other taxes. She can deduct educational expenses, some work-related travel expenses and a myriad of other things.

In your example you present something like the worst case. A family with the highest standard deduction and no itemizable deductions beyond their mortgage interest. The latter describes practically no one.

Print the post Back To Top
Author: notehound Big gold star, 5000 posts Top Recommended Fools Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 366283 of 465377
Subject: Re: Value of mortgage deduction to homeownership Date: 7/21/2011 8:51 AM
Post New | Post Reply | Reply Later | Create Poll Report this Post | Recommend it!
Recommendations: 0
The deduction primarily helps out those with second houses, larger houses than you cited, or with other itemized expenses which push up their possible itemized deductions.

If curtailment of the 2nd home eligibility and/or capping the loan amount at about half of the present limit were the intention, then the Gang of Six should have telegraphed that intent.

Right now, even the talk show hosts are saying that the Gang of Six want to "take away your right to deduct mortgage interest" and want to "tax gifts to your church or synagogue."

Poor communication may yet derail the proposed deal.

Print the post Back To Top
Author: MegHammond Big red star, 1000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 366285 of 465377
Subject: Re: Value of mortgage deduction to homeownership Date: 7/21/2011 9:07 AM
Post New | Post Reply | Reply Later | Create Poll Report this Post | Recommend it!
Recommendations: 4
1) The median income family should NOT be purchasing the median house in the US. The housing to income ratio is too high at 3.67. My opinion is that this indicates some combination of too high house prices and/or too low family income. But for the time being, let’s ignore this and assume the family somehow gets the loan.


This point needs to be repeated. It needs to be repeated over and over until those who bemoan the fact that housing prices are stillfalling understand they are grieving the loss of a market that is NOT in equilibrium. The rent is too damn high.

Thanks for your post Yoda.

Print the post Back To Top
Author: qazulight Big gold star, 5000 posts Top Recommended Fools Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 366289 of 465377
Subject: Re: Value of mortgage deduction to homeownership Date: 7/21/2011 9:31 AM
Post New | Post Reply | Reply Later | Create Poll Report this Post | Recommend it!
Recommendations: 2
Yoda,

In Texas, the property taxes on that house would run about 3300 dollars a year. (With homestead exemption). That would bring the deduction up to about 12000 dollars and the family would get almost enough back to pay H&R Block for filing the form.

However, if the home was purchased by a single head of household the standard deduction would be about 8500 dollars. Also, if they did not have perfect credit. (Often the case after a divorce) the interest rate may be closer to 5.5 percent. This would bring the interest in the first year up closer to 9500 hundred dollars and the deduction up to about 4500 dollars (13000 minus the standard deduction of 8500) At a marginal top tax rate of 25 percent, the taxpayer would see a net benefit of about 90 dollars a month.

Typically 90 dollars a month buys about 10,000 dollars worth of house. (Typically) As not all tax payers fall into this category, nor do all houses, then we can expect that the price pressure will be mitigated to non-existent in some parts of the country, (think Houston) and some what pronounced in others, (Like San Francisco) Over all I think the pressure from removing the tax deduction would be less than 5 percent in the higher income and higher housing cost areas, and non-existent in the lower income lower cost areas.

Additionally, factoring in the lowering of the artificial demand for 30 money may lower long term interest rates enough to make the price pressure infinitesimally small. At the very least it may help replace the lack of buying at the treasury.

Cheer
Qazulight

Post New | Post Reply | Reply Later | Create Poll Report this Post | Recommend it!
Print the post Back To Top
Author: Jeanwa Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 366290 of 465377
Subject: Re: Value of mortgage deduction to homeownership Date: 7/21/2011 9:32 AM
Post New | Post Reply | Reply Later | Create Poll Report this Post | Recommend it!
Recommendations: 3
Right now, even the talk show hosts are saying that the Gang of Six want to "take away your right to deduct mortgage interest" and want to "tax gifts to your church or synagogue."

I would think that most of those "talking heads" or their bosses take advantage of the interest deduction.

I'm pretty sure they don't want their right to the deducton taken away.

Isn't that why were here, to fact check the news?

Jean

Print the post Back To Top
Author: Jeanwa Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 366292 of 465377
Subject: Re: Value of mortgage deduction to homeownership Date: 7/21/2011 9:36 AM
Post New | Post Reply | Reply Later | Create Poll Report this Post | Recommend it!
Recommendations: 0
In Texas, the property taxes on that house would run about 3300 dollars a year.

==========================

Of which $1000 if married, $500 if single can be deducted without itemizing, if I remember right.

Jean

Print the post Back To Top
Author: GardenStateFool Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 366294 of 465377
Subject: Re: Value of mortgage deduction to homeownership Date: 7/21/2011 9:54 AM
Post New | Post Reply | Reply Later | Create Poll Report this Post | Recommend it!
Recommendations: 4
4) The standard deduction for this family is $11,400. Until the sum of mortgage interest, real estate taxes, charitable contributions etc. exceeds that, there are ZERO tax savings.

5) The total first year interest payments on this loan are $8,476. So by itself, the mortgage interest deduction saves ZERO dollars of taxes for this family, any way you look at it within reason.


I think it is impossible to take into account the mortgage on the house but NOT include in the calculation for property taxes as well. If you have a home, it is reasonable to assume that it will come with property taxes.

So the question becomes, does the property tax/mortgage interest combo then push the family into itemized deduction territory?

Also, you're working on averages. I'd be interested to see how this works out in a high property tax vs. low property tax area.

For me, the combination of mortagage interest, property taxes, and state taxes (welcome to NJ!) have considerable impact on my total tax bill.

GSF

Print the post Back To Top
Author: steve203 Big funky green star, 20000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 366298 of 465377
Subject: Re: Value of mortgage deduction to homeownership Date: 7/21/2011 11:27 AM
Post New | Post Reply | Reply Later | Create Poll Report this Post | Recommend it!
Recommendations: 3
Right now, even the talk show hosts are saying that the Gang of Six want to "take away your right to deduct mortgage interest" and want to "tax gifts to your church or synagogue."

Propaganda put out by those who benefit the most, to get the mob in a panic about losing a government handout.

Bailout nation.

Steve

Print the post Back To Top
Author: WendyBG Big gold star, 5000 posts Top Favorite Fools Top Recommended Fools Feste Award Winner! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 366302 of 465377
Subject: Re: Value of mortgage deduction to homeownership Date: 7/21/2011 12:09 PM
Post New | Post Reply | Reply Later | Create Poll Report this Post | Recommend it!
Recommendations: 1
Thank you for writing your excellent post.

<The median income family should NOT be purchasing the median house in the US. The housing to income ratio is too high at 3.67.>

The only thing I would add to this is data.

http://en.wikipedia.org/wiki/Real_estate_bubble

http://www.standardandpoors.com/servlet/BlobServer?blobheade...

Residential cost should include mortgage, taxes, utilities and insurance, since the cost of these essentials can vary immensely from place to place.

DS's family, who live in NJ, pay $12,000 per year property taxes, while I only pay $1700.

Another way to look at your data.

<Median family income $50,221>

What is the net monthly income (after taxes)?

If this family pays 25% of its net income on housing (including mortgage, taxes, utilities and insurance) how much house can they afford?

What if they paid 33%?

Wendy

Post New | Post Reply | Reply Later | Create Poll Report this Post | Recommend it!
Print the post Back To Top
Author: Watty56 Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 366303 of 465377
Subject: Re: Value of mortgage deduction to homeownership Date: 7/21/2011 12:12 PM
Post New | Post Reply | Reply Later | Create Poll Report this Post | Recommend it!
Recommendations: 1
Part of the reason that many people cannot itemize enough to exceed their standard deduction is that mortgage interest rates are so low right now. Sooner or later they will go back up and with an 8% mortgage many more people will be able to itemize.

As I recall one of the reasons that making mortgage interest deductable for individuals is that if someone owns an investment property then they can deduct mortgage interest as a business expense. Letting individuals deduct their mortgage interest too makes it a level playing field so that the owning vs renting decision is less influenced by the tax laws.

Greg

Print the post Back To Top
Author: Jeanwa Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 366308 of 465377
Subject: Re: Value of mortgage deduction to homeownership Date: 7/21/2011 12:29 PM
Post New | Post Reply | Reply Later | Create Poll Report this Post | Recommend it!
Recommendations: 1
As I recall one of the reasons that making mortgage interest deductable for individuals is that if someone owns an investment property then they can deduct mortgage interest as a business expense. Letting individuals deduct their mortgage interest too makes it a level playing field so that the owning vs renting decision is less influenced by the tax laws.

Greg
================================

Are you saying the landlord passes the tax deduction savings on to the renter? He charges less rent because he can deduct the interest on the loan?

If I'm not mistaken that doesn't happen. The landlord is going to charge what the market will bear. Whether he has a net income or loss could depend in part on the interest deduction, but I don't think it has anything to do with what he charges for rent.

Jean

Print the post Back To Top
Author: steve203 Big funky green star, 20000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 366309 of 465377
Subject: Re: Value of mortgage deduction to homeownership Date: 7/21/2011 12:48 PM
Post New | Post Reply | Reply Later | Create Poll Report this Post | Recommend it!
Recommendations: 0
Letting individuals deduct their mortgage interest too makes it a level playing field so that the owning vs renting decision is less influenced by the tax laws.

If the intent was a "level playing field" then individuals would pay tax on net income, after living expenses are paid, not gross income.

Steve

Print the post Back To Top
Author: Windchasers Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 366314 of 465377
Subject: Re: Value of mortgage deduction to homeownership Date: 7/21/2011 1:48 PM
Post New | Post Reply | Reply Later | Create Poll Report this Post | Recommend it!
Recommendations: 4
Are you saying the landlord passes the tax deduction savings on to the renter? He charges less rent because he can deduct the interest on the loan?

If I'm not mistaken that doesn't happen. The landlord is going to charge what the market will bear. Whether he has a net income or loss could depend in part on the interest deduction, but I don't think it has anything to do with what he charges for rent.



Well, if the landlord *can* charge less rent but doesn't, then he's taking more profit. The increased profitability will draw in competitors, driving up supply and pushing the cost of rent down. At least, this is the answer I'd expect an economist would give.

Print the post Back To Top
Author: JonathanRoth Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 366315 of 465377
Subject: Re: Value of mortgage deduction to homeownership Date: 7/21/2011 1:48 PM
Post New | Post Reply | Reply Later | Create Poll Report this Post | Recommend it!
Recommendations: 1
I think there is another advantage which isn't being addressed. That is they are actually purchasing something and over time will likely have some property value.

In 1998 we purchased a SFH in 2001 we purchased a 4-plex. After all expenses we're getting a 6% ROI from the units.

They are paying us more to rent from us then we pay for our larger and nicer home.

Taxes shouldn't be a driving reason to purchase a house. Taxes should be a nice plus.

Print the post Back To Top
Author: warrl Big funky green star, 20000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 366318 of 465377
Subject: Re: Value of mortgage deduction to homeownership Date: 7/21/2011 2:27 PM
Post New | Post Reply | Reply Later | Create Poll Report this Post | Recommend it!
Recommendations: 2
A few observations:

1) The median income family should NOT be purchasing the median house in the US.


This is indisputably true - and has always been true. In fact, only about two-thirds of households are homeowners. (While this is about normal in the industrialized world, in historical terms it is abnormally high.)

As a first approximation, those two-thirds are going to be the higher-income two-thirds. The mean income of the higher-income 60% is about $99,700 (2009 data), or nearly twice the US median household income.

(But that's only a first approximation. There are lots of confounding factors.)

Print the post Back To Top
Author: brucedoe Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 366330 of 465377
Subject: Re: Value of mortgage deduction to homeownership Date: 7/21/2011 6:17 PM
Post New | Post Reply | Reply Later | Create Poll Report this Post | Recommend it!
Recommendations: 1
patchdodd

I think you are forgetting the automatic deduction for this sort of things. Even we do not get any credit for our donations, medical expenses above 7.5% and property taxes because of the $13,500 deduction (because we are so old we get an extra $2,000) even though we have several contributions of $1,000 to over $3,000. We do top $10,000 though. Certainly a family median income could not afford this. So your median family can not take advantage of deductions.

brucedoe

Print the post Back To Top
Author: DavidAnglin Big red star, 1000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 366337 of 465377
Subject: Re: Value of mortgage deduction to homeownership Date: 7/21/2011 8:32 PM
Post New | Post Reply | Reply Later | Create Poll Report this Post | Recommend it!
Recommendations: 0
YodaOrange,

Some people think incorrectly, that only first home's qualify for the mortgage interest deduction.

Can you or some other bright bulb on this board list all of the "homes" that currently qualify?

Now that I know that second homes qualify (I heard that before and was sort of surprised), then recently I heard that manufactured homes do not qualify, but certain Recreational Vehicles and (could this be true?) yachts qualify.

Is there any one who can provide the definitive list of "homes" that qualify for this deduction under current rules?

And... is there a means adjusted cap for the mortgage interest deduction?

Just wondering,

jan

:^)

Print the post Back To Top
Author: synchronicityII Big funky green star, 20000 posts Top Favorite Fools Top Recommended Fools Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 366338 of 465377
Subject: Re: Value of mortgage deduction to homeownership Date: 7/21/2011 8:37 PM
Post New | Post Reply | Reply Later | Create Poll Report this Post | Recommend it!
Recommendations: 8
Yoda,

I appreciate any tax related post that utilizes actual data and an understanding of the tax code, so I am grateful for your analysis. Having said that, I'm going to pick some nits, most of which I believe have been addressed on some level earlier in this thread.

A) The median income family should NOT be purchasing the median house in the US. The housing to income ratio is too high at 3.67. My opinion is that this indicates some combination of too high house prices and/or too low family income. But for the time being, let’s ignore this and assume the family somehow gets the loan.

As warrl noted and I would agree, in general I would be stunned if the median income family is not buying median income houses. Assuming warrl's estimate is correct, approximately one third of families are not homeowners but renters (or homeless or whatnot if we want to extend this). Although there are many reasons why a family might not a home, I suspect the most common reason is a lack of the financial resources to do so.

If we were to look at the median income of families that actually own homes, I suspect they would be considerably higher than the median income of all families in the US. I'm too lazy to pull up the SOI reports to see if they have any data on this, but may check later if I have time (which likely means "never happen"", but anyway...). The main point of this is that the hypothetical family purchasing the "median cost home" likely has higher income (and higher taxable income) than your hypothetical.

B) No other itemized deductions for the family, other than mortgage interest

This is a completely unrealistic assumption for two reasons. 1) If the family owns a home, then it is pretty much a certainty that they are paying property taxes on said home. Obviously these rates vary widely across the country, but I would expect those rates to be (effectively) at least 1% of FMV, and very possibly above 2% of FMV (as they are in both the area where I currently own a home and the area where I will be owning one in the near future). For the median home discussed, this adds ~1,843 to ~3,688 (or more) to the itemized deductions. (as ntoed upthread, $500 or $1,000 of this generally can be taken as part of the standard deduction if one does not itemize) 2) One can always deduct either state income taxes paid or (in states with no income tax) sales taxes as per the tables in the Schedule A instructions. Depending on state income or sales tax rates, this can easily be another one to three thousand dollars of deductions. THBS, it is certainly true that the overall impact of the mortgage interest deduction is somewhat limited, as it only reduces taxes to the extent that total itemized deductions exceed the the allowed standard deduction.

Without taking sides in the political debate over this or any other issue, I will note removing the mortgage interest deduction is a difficult sell. The demographic which is most impacted can be described as "upper middle class". These are often married couples in their early 30's to late 40's with one or more school age children with income somewhere between 75K to 125K (and obviously, homeowners). Unlike "the poor" or "the rich" (however one chooses to define these terms), who are often depicted in negative terms by various political factions, this group generally garners sympathy from people on either side of the aisle and is often presented as a type of (idealized) "average American family" (I am well aware that such a family is, in fact, "above average", hence "idealized", as it is a somewhat aspirational goal for many people). Although the political appeal of a proposal is a separate issue from its merits, any such proposal needs sufficient support to become a reality.

-synchronicity

Post New | Post Reply | Reply Later | Create Poll Report this Post | Recommend it!
Print the post Back To Top
Author: Jeanwa Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 366339 of 465377
Subject: Re: Value of mortgage deduction to homeownership Date: 7/21/2011 8:40 PM
Post New | Post Reply | Reply Later | Create Poll Report this Post | Recommend it!
Recommendations: 3
Here you go.

http://www.irs.gov/taxtopics/tc505.html

Qualified residence interest is interest you pay on a loan secured by your main home or a second home. Your main home is where you live most of the time. It can be a house, cooperative apartment, condominium, mobile home, house trailer, or houseboat that has sleeping, cooking and toilet facilities.

A second home can include any other residence you own, and treat as a second home. You do not have to use the home during the year. However, if you rent it to others, you must also use it as a home during the year for more than the greater of 14 days or 10 percent of the number of days you rent it, for the interest to qualify as qualified residence interest.

Qualified residence interest and points are generally reported to you on Form 1098 (PDF), Mortgage Interest Statement, by the financial institution to which you made the payments. The following mortgages yield qualified residence interest and you can deduct all of the interest on these mortgages:

A mortgage you took out on or before October 13, 1987 (grandfathered debt)
A mortgage taken out after October 13, 1987, to buy, build, or improve your home, (called home acquisition debt) up to a total of $1 million for this debt plus any grandfathered debt. The limit is $500,000 if you are married filing separately.
A mortgage taken out after October 13, 1987, that does not qualify as home acquisition debt (called home equity debt), up to a total of $100,000 throughout 2010. The limit is $50,000 if you are married filing separately. Home equity debt is further limited to your home's fair market value minus grandfathered debt and home acquisition debt.

If one or more of your mortgages does not fit into any of these categories, refer to Publication 936, Home Mortgage Interest Deduction, to figure the amount of interest you can deduct.


Post New | Post Reply | Reply Later | Create Poll Report this Post | Recommend it!
Print the post Back To Top
Author: exeter17 Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 366340 of 465377
Subject: Re: Value of mortgage deduction to homeownership Date: 7/21/2011 8:47 PM
Post New | Post Reply | Reply Later | Create Poll Report this Post | Recommend it!
Recommendations: 0
Yoda, you put math to my theories. And you did a better job than I did :)

Print the post Back To Top
Author: Jeanwa Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 366344 of 465377
Subject: Re: Value of mortgage deduction to homeownership Date: 7/21/2011 8:54 PM
Post New | Post Reply | Reply Later | Create Poll Report this Post | Recommend it!
Recommendations: 1
Sync...did you say this correctly?

As warrl noted and I would agree, in general I would be stunned if the median income family is not buying median income houses.

So you think the median income family is buying the median house?

Oh, the medium income of homeowners, not the entire poputlation are buying the medium income house.


If we were to look at the median income of families that actually own homes, I suspect they would be considerably higher than the median income of all families in the US. I'm too lazy to pull up the SOI reports to see if they have any data on this, but may check later if I have time (which likely means "never happen"", but anyway...). The main point of this is that the hypothetical family purchasing the "median cost home" likely has higher income (and higher taxable income) than your hypothetical.

Here's a chart. It's from 2004, but I think it shows what you are saying.

http://en.wikipedia.org/wiki/Household_income_in_the_United_...

Down in the quintiles it shows the home ownership/rental data.

Jean

Print the post Back To Top
Author: hawaiifiveoh Two stars, 250 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 366347 of 465377
Subject: Re: Value of mortgage deduction to homeownership Date: 7/21/2011 9:27 PM
Post New | Post Reply | Reply Later | Create Poll Report this Post | Recommend it!
Recommendations: 1
As I recall one of the reasons that making mortgage interest deductable for individuals is that if someone owns an investment property then they can deduct mortgage interest as a business expense. Letting individuals deduct their mortgage interest too makes it a level playing field so that the owning vs renting decision is less influenced by the tax laws.

Greg


That helps, but the playing field is still not level. I can't take depreciation expense to lower my taxable income on my residence as I could on my investment property.

Print the post Back To Top
Author: synchronicityII Big funky green star, 20000 posts Top Favorite Fools Top Recommended Fools Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 366349 of 465377
Subject: Re: Value of mortgage deduction to homeownership Date: 7/21/2011 9:33 PM
Post New | Post Reply | Reply Later | Create Poll Report this Post | Recommend it!
Recommendations: 0
Jean:

Yes, I phrased that incorrectly. The point I was trying to make is that the people who buy houses are generally higher income than people who rent, so "median" houses are being bought by "higher than median" income families. The wikipedia link you posted supports my contention. I still haven't checked Statistics Of Income to see if any of their reports address the issue. If someone is more industrious than I, they can look thru the spreadsheets here: http://www.irs.gov/taxstats/indtaxstats/article/0,,id=133414...

-synchronicity

Print the post Back To Top
Author: Jeanwa Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 366353 of 465377
Subject: Re: Value of mortgage deduction to homeownership Date: 7/21/2011 9:50 PM
Post New | Post Reply | Reply Later | Create Poll Report this Post | Recommend it!
Recommendations: 0
If you read what Yoda wrote...he's basicly saying the same thing.

The median income family should NOT be purchasing the median house in the US. The housing to income ratio is too high at 3.67. My opinion is that this indicates some combination of too high house prices and/or too low family income.

Granted it could have been worded differently. But to me he was saying that the medium income house hold was probably not buying a medium income house...or they shouldn't be because of the income ratio

He then went on with his example

But for the time being, let’s ignore this and assume the family somehow gets the loan.

but your point is very important.

Without taking sides in the political debate over this or any other issue, I will note removing the mortgage interest deduction is a difficult sell. The demographic which is most impacted can be described as "upper middle class". These are often married couples in their early 30's to late 40's with one or more school age children with income somewhere between 75K to 125K (and obviously, homeowners).

For my area I would lower the income to $60,000, but these are the people who, IMHO, get involved in elections. They donate money. They campaign.

Jean

Print the post Back To Top
Author: DavidAnglin Big red star, 1000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 366355 of 465377
Subject: Re: Value of mortgage deduction to homeownership Date: 7/21/2011 9:56 PM
Post New | Post Reply | Reply Later | Create Poll Report this Post | Recommend it!
Recommendations: 0
Jeanwa,

Thanks... so the same things that are listed as main homes can also be second homes...

And I did not see a means test of any kind.

Did I read it right?

thanks,

jan

:^)

Print the post Back To Top
Author: yodaorange Big red star, 1000 posts Feste Award Nominee! Feste Award Winner! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 366356 of 465377
Subject: Re: Value of mortgage deduction to homeownership Date: 7/21/2011 9:59 PM
Post New | Post Reply | Reply Later | Create Poll Report this Post | Recommend it!
Recommendations: 8
Several folks made the reasonable observation that anyone owning a house would also be paying property taxes. So I changed the assumptions to include:

Pay 2% of purchase price in property tax = $3,686

Live in a no income tax state and take the sales tax default deduction (4%) of $515

I still maintain it is reasonable to NOT have any charitable deductions for this family. With 2 adults, 2 kids and a $184k house, how much will they have left over for charity?

New observations:

1. Adding in the property taxes and sales tax reduction increased their refund from $4 to $199. So they pocket an extra $195 per year which is $16.25 per month.

2. The benefit of deductible mortgage effectively reduces their mortgage payment from $935 to $919. Stated differently, the new payment is 98.3% of the old payment for a 1.7% savings.

3. And once again, as the mortgage ages, the amount of interest paid goes down. So the savings is the maximum the first year and decrease each year until it goes to zero.

4. Something that I should have explicitly stated in the original post is extremely important. The incremental tax rate for this family is 15%. When the total itemized deductions exceed the standard deduction, it reduces taxes by 15 cents per dollar of incremental deductions.

5. My BOTTOM LINE 1 is slightly revised for this new scenario.

BOTTOM LINE number 1 is that the median family buying the median home gets ESSENTIALLY ZERO benefit from having mortgage interest deductible in today’s environment. If interest rates were to rise, then it might be produce a savings. But if that occurs, the family could only afford a less expensive house. I sure hope that a 1.7% reduction in house payments does not influence the financial decision to buy/not to buy.

6. BOTTOM LINE 4 is that some folks purchase houses believing they will have major savings on their income tax due to the mortgage deduction. They might not be as anal as I am to actually model their new taxes before they make the purchase. They are surprised to learn that their tax savings is zero or close to it. I have in fact heard this from several CPA’s and tax preparers in the last few years.

And yes, I was already working on the IRS statistical data. Some parts of the data are so bizarre, that I am NOT going to post it until I can justify in my own mind why it is correct. Frankly, my first impression of the data is that it is NOT correct.

Thanks,

Yodaorange

Post New | Post Reply | Reply Later | Create Poll Report this Post | Recommend it!
Print the post Back To Top
Author: synchronicityII Big funky green star, 20000 posts Top Favorite Fools Top Recommended Fools Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 366361 of 465377
Subject: Re: Value of mortgage deduction to homeownership Date: 7/21/2011 10:47 PM
Post New | Post Reply | Reply Later | Create Poll Report this Post | Recommend it!
Recommendations: 7
Yoda:

Again, I appreciate what you're doing, but want to reiterate that it is unrealistic to assume that a family earning median income (just over 50K) is buying a median price home. I will also add that if you're looking at married couples with school age children, the median income of that demographic is considerably higher than that of all families in the US. This obviously does not change the fact that the itemized deduction amount will likely only be slightly higher than the standard deduction for a family purchasing a "median price" house, but said family will likely be in the 15% or 25% federal tax bracket so every $ above the standard amount will reduce their federal liability by 15 or 25 cents.

WRT to the itemized deduction amount, the hypothetical of "no income tax state, default sales tax deduction" is, IMHO, VERY unrealistic. First, most every state has a state income tax, at rates considerably higher than 1% ($500 of the 50K median income). This aspect also ties in to the fact that our hypothetical family will almost definitely be earning more than 50K to be "typical", as state income taxes would be higher. Second, EVEN IF we only look at sales taxes, those states with no income tax generally have higher sales taxes. In Texas the default rate is 6.25%, which at 50-60K income and 4 exemptions total results in a $910 sales tax deduction (higher if one lives in most cities in Texas, which again will encompass a substantial [majority] of the population). Florida's state sales tax is also apparently 6%.

Again, I understand that for many people, the mortgage interest deduction results in a very limited tax savings, but I believe that you are underestimating its impact with your example.

One last comment:

I was already working on the IRS statistical data. Some parts of the data are so bizarre, that I am NOT going to post it until I can justify in my own mind why it is correct. Frankly, my first impression of the data is that it is NOT correct.

Can you tell us what you are seeing that you believe is incorrect?

-synchronicity

Post New | Post Reply | Reply Later | Create Poll Report this Post | Recommend it!
Print the post Back To Top
Author: synchronicityII Big funky green star, 20000 posts Top Favorite Fools Top Recommended Fools Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 366363 of 465377
Subject: Re: Value of mortgage deduction to homeownership Date: 7/21/2011 10:56 PM
Post New | Post Reply | Reply Later | Create Poll Report this Post | Recommend it!
Recommendations: 5
to me he was saying that the medium income house hold was probably not buying a medium income house...or they shouldn't be because of the income ratio

He then went on with his example


Right, but the example is not terribly realistic, because a 50K family with two kids is not buying that median home. They may both be "medians" for the US overall, but they're not really comparable. The universe of "homeowning households" is a subset of all US households and generally has higher incomes than non-homeowning US households.

I generally like what yoda is doing, so please don't take my criticisms as overly harsh, but rather as a generally friendly discussion. This just happens to fall into an area where I have some interest (no pun intended).

-synchronicity

Print the post Back To Top
Author: ngcpa Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 366396 of 465377
Subject: Re: Value of mortgage deduction to homeownership Date: 7/22/2011 9:05 AM
Post New | Post Reply | Reply Later | Create Poll Report this Post | Recommend it!
Recommendations: 3
For incomes of $30K-50K the average interest itemized deduction (based on 2008 IRS statistics) was $ 9,245. However the OTHER itemized deductions total $ 12,172! Note, this DOES NOT even include miscellaneous itemized deductions. This information comes from CCH:

http://www.cch.com/wbot2011/029AvgItemizedDeductions.asp

I find the information from the above source fascinating. Especially when you compare the first level of AGI to the next to last level:

- 10 times the income, but only 3 times the charitable contributions.
- 10 times the income, but only 2 times the interest deduction
- 10 times the income, but only 6 times the deduction for taxes.

I also suspect a significant number of folks in the 15K-30K range are either receiving under the table payments and or are taking the magic pencil to other deductions (medical and charity). Otherwise I don't see how they can make it.

One thing to remember when observing CCH's data is that it is data that people CLAIM they pay, not necessarily what they ACTUALLY pay. As a retired tax preparer, I have little doubt that there is a large difference,
Norm

Print the post Back To Top
Author: qazulight Big gold star, 5000 posts Top Recommended Fools Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 366407 of 465377
Subject: Re: Value of mortgage deduction to homeownership Date: 7/22/2011 10:53 AM
Post New | Post Reply | Reply Later | Create Poll Report this Post | Recommend it!
Recommendations: 0
Yoda,

You are correct as far as the analysis goes. The fact are already apparent, at least to me. A married man with a family of four that had a mortgage in Texas and only filed a 1040 form in the years where I had hurricane damage. The standard deduction, even with a fairly large charitable donation and a top 25 percent marginal rate, didn't even come close to being worthwhile. (6.5 percent on 87,000)

The thing that I attempted to point out is that many, if not a majority of the households in the U.S. do not file a married return, rather a head of household or single. In these cases the math works much better.

Additionally, we, (I.E. METAR) are not terribly interested in the plight of the masses. While to some extent we are interested in our own situations which are never typical; in reality we are interested in the MACRO implications.

My take is that in the non-housing bubble areas, which are seeing some building and price stability, the impact would be about zero. In the housing bubble areas like California and Florida, the impact could be as much as 5 percent on the median price of the properties in those areas.

Even this impact may not be that big a deal in the big scheme of things because the losses are so large already that 5 percent more would just be lost in the sea of red ink. I could be wrong, but attempting to parse these ideas gives me a headache.

Cheers
Qazulight

Post New | Post Reply | Reply Later | Create Poll Report this Post | Recommend it!
Print the post Back To Top
Author: albaby1 Big gold star, 5000 posts Top Favorite Fools Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 366409 of 465377
Subject: Re: Value of mortgage deduction to homeownership Date: 7/22/2011 11:14 AM
Post New | Post Reply | Reply Later | Create Poll Report this Post | Recommend it!
Recommendations: 4
I also suspect a significant number of folks in the 15K-30K range are either receiving under the table payments and or are taking the magic pencil to other deductions (medical and charity). Otherwise I don't see how they can make it.

I defer to those with greater tax knowledge than I have, but it's important to remember that income is not the same as wealth - especially among the retired set. Some of those folks in the 15K-30K AGI range will be older retired folks with a decent-size retirement portfolio. Between income that is outside of AGI (tax-exempt munis and part of Social Security) and drawdown of existing assets that are used to pay deductible expenses (charitable gifts and property taxes), I expect that retirees account for a big part of what seems odd there. Particularly since the averages are only for those returns that don't take the standard deductions, so they may not represent a large portion of that income cohort in the first place.

Albaby

Print the post Back To Top
Author: dwot Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 366416 of 465377
Subject: Re: Value of mortgage deduction to homeownership Date: 7/22/2011 11:38 AM
Post New | Post Reply | Reply Later | Create Poll Report this Post | Recommend it!
Recommendations: 1
"10) BOTTOM LINE number 3 is that mortgage rates are INFINITELY more important in housing affordability than the mortgage interest deductions. Some of us recall when mortgage rates were 10%+ plus back in the 1980’s. If the goal of Treasury and the fed is to encourage home ownership, they are doing exactly the right thing by forcing down interest rates. (Yes, I am going to leave out the unintended consequences of artificially low rates)"

This is only true in theory, and it in practice it is absolutely wrong. The low interest rates is what created the massive house price inflation and without proper controls on lending that not based on the currently grossly wrong system of ability to pay the mortgage based on income and current interest rate and zero built into it for the grossly declining ability to get out of debt with this model, well, low interest rates have been a disaster for the economy in practically every aspect that you examine, with bad investments everywhere.

The lower your interest rates the more banks can create money out of thin air and destroy the monetary system and all good values for how one ought to live their life for financial success in place of bubble chasing.

Print the post Back To Top
Author: notehound Big gold star, 5000 posts Top Recommended Fools Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 366429 of 465377
Subject: Re: Value of mortgage deduction to homeownership Date: 7/22/2011 1:03 PM
Post New | Post Reply | Reply Later | Create Poll Report this Post | Recommend it!
Recommendations: 1
Some of us recall when mortgage rates were 10%+ plus back in the 1980’s...

Try 13% plus in early-mid 1984, just on the cusp of the boom that brought us jobs, Dynasty, Dallas and the glamorous years...

I remember my mortgage rates over the last 30 years, as follows:

12.5% - Dec., 1984
9.5% - Feb., 1987
9.0% - April, 1991
7.5% - June, 1996
5.375% - April, 2003
Now - paid off mortgage.

During this period of time, the bankers have increased their hold over the politicians and over the entire economy, middle class jobs have slowly disappeared and income disparity has steadily grown.

I sometimes wonder how the country recovered from the S&L crisis of 1989-1991 with merely a recession, but without entering a deflationary depression. Methinks the 2008 banking crisis should have been handled from the S&L crisis playbook instead of following the Japanese extend-and-pretend model which has provent to bring decades of deflation and stagnation.

We seem to learn nothing from history.

:-(

Print the post Back To Top
UnThreaded | Threaded | Whole Thread (35) | Ignore Thread Prev Thread | Next Thread
Advertisement