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REALTORS® Believe in the American Dream…and the Mortgage Interest Deduction

One thing you can say for the President’s National Commission on Fiscal Responsibility and Reform is that they definitely know how to get people’s attention.

Last week, the co-chairs of the bi-partisan deficit reduction panel released details of a preliminary draft report that is intended to identify policies to improve the country’s fiscal situation in the medium term and to achieve fiscal sustainability over the long run. 

The details of the draft report that were made public are being called a “trial balloon” by many since the final report will only include those ideas that are agreed upon by 14 out of the 18 members of the commission. That is a very high standard and means that there will likely be quite a few ideas that don’t make it in the final report, which is expected to be released on December 1.

One topic for consideration in the draft report is the idea of lowering the cap on the mortgage interest deduction. Currently, people may deduct the interest they pay up to a total mortgage amount of $1 million. This deduction applies for combined mortgages on primary residences and second homes, up to the total $1 million limit. The proposal in the draft report would lower the limit for the mortgage interest deduction to $500,000 for the mortgage and would restrict it to only the primary residence.

To try to better explain it…now, if you have a $750,000 mortgage on your primary residence, a $500,000 mortgage on a second home and pay a total of $75,000 in interest on both properties, you can deduct only $60,000 of the interest, which is the interest paid on the first $1 million. Under the proposal, with the same terms, you would only be able to deduct $30,000, which is the interest on the first $500,000 of your mortgage on only your primary residence. 

This would not be a stand-alone change, so obviously other changes might decrease or increase the net impact on your taxes.  For example, other recommendations from the report include tripling the standard deduction to $15,000 for individuals ($30,000 for married couples), repealing the deduction of state and local taxes on your federal income tax return and establishing marginal tax rates of 15%, 25% and 35%. 

To put this process in context, the last time a tax reform measure of this magnitude was enacted was in 1986, and it took about two years for it to make its way through Congress and the president, so I don’t expect swift action in this case either.

According to the U.S. Census Bureau, 62.3% of people living in our region own their home. That is quite a few people who benefit from the mortgage interest deduction. Nationwide, Americans will save $104 billion on their taxes in 2011 because of the mortgage interest deduction, according to the Tax Foundation, a Washington, D.C.-based research group.

Owning property has been the cornerstone of American society and our economy for centuries. As someone said recently at an industry event, “I don’t think very many children dream about some day renting a home. There’s a reason why homeownership is called the American Dream.”

Thankfully, our local representatives in Congress know the importance of the mortgage interest deduction. Rep. John Culberson (R-Houston) who represents all the Examiner Newspapers distribution areas told us, “The mortgage interest deduction is a valuable tool to assist homeowners through this recession. Preserving the mortgage interest deduction is essential to revitalizing the housing market, restoring our economy and protecting overburdened taxpayers.”

While there may be aspects of this draft proposal that we don’t like and some that we do, I think everyone agrees that we need to take steps to ensure our economic viability and stability. Owning a home has intrinsic value for the owner and provides stability for the neighborhood and society. We should be taking steps to encourage more people to purchase homes, not making it less desirable.

REALTORS® believe that anyone who is able and willing to assume the responsibilities of owning a home should have the opportunity to pursue that dream. You can rest assured that we will be working with our public policy makers and industry leaders to ensure a model for responsible, sustainable homeownership, including keeping the mortgage interest deduction in place.

Margie Dorrance is the 2010 Chair of the Board of the Houston Association of REALTORS®, representing more than 25,000 members. She is also a principal at the Keller Williams Realty Metropolitan and has been in the real estate industry in Houston for more than 30 years.

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