How Mortgage Interest Deduction Affects Homeownership

Twenty-six years after Congress last reformed the tax code, Washington is once again saying it’s time to start over with a “blank slate” approach to tax reform.

Senators have been tasked with presenting any current deductions, exemptions, and credits they’d like included in the code. Drafting of a tax reform package will occur during the August congressional recess.

If you’ve found yourself reading this blog, chances are, you’re in the market for a home in Central Texas and the mortgage interest deduction (MID) will help make that affordable.  And, while the MID is particularly helpful for younger and recent homebuyers, who are paying mostly interest in the early years of a mortgage, wiping the deduction from the tax code will affect us all.

Let’s take a look at that $180,000 home you found on AustinHomeSearch.com. The mortgage interest deduction allows taxpayers whom own their home to reduce their taxable income by the amount of interest paid on the mortgage loan.  That’s great, but as a homebuyer, we know you’re really interested in getting down to the brass tax—no pun intended.

According to the National Association of Homebuilders (NAHB), a family with a joint income of $80,000 and a mortgage of $180,000, assuming that the interest rate on the mortgage is 5.5 percent, will save $7,050 in taxes during the first five years of ownership. The amount of the deduction dips slightly each year as the amount of interest that the homeowner pays drops and the portion of their monthly payment that is applied to the loan principal increases.

In May, the National Association of REALTORS® (NAR) cited a recent study conducted by the Hudson Institute, which analyzed individual income tax returns in 2007. The study found that the greatest share of the mortgage interest deduction lies not with the wealthy Americans, but with the middle class. Households within the $75,000 to $200,000 income range claim more than half of the MID deduction, and 22 percent of the deduction went to households with incomes between $50,000 and $75,000. Conversely, the top five percent of taxpayers account for less than 20 percent of the deduction.

In short, a middle class American household making up to $200,000 annually and paying taxes on a home will be affected if the MID is wiped from the tax code. Sound familiar? It does to us. That’s why the Austin Board of REALTORS® and NAR recognize the importance of keeping the MID in the tax code. After all, tax reform should “do no harm.”

To tell your Senator you’d like to keep the MID or for more information about the MID and the “blank slate approach,” please visit here and here.


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