Here are some thoughts/facts about the mortgage interest deduction and its future. With all the talk in Washington over budget cuts and tax reform, the mortgage interest deduction is a large target. Here’s why:
- The Government Budget Offices say the MID costs the government over 100 Billion Dollars per year in revenue. Politicians see this as an easy way to get revenue ($100 Billion) without raising taxes.
- The Cato Institute, Brookings Institute, The Center for American Progress, American Enterprise Institute and the President’s Simpson Bowles Commission on Fiscal Responsibility all recommend that the mortgage interest deduction be eliminated.
- To eliminate or severely restrict MID is gaining support from both parties and the President.
Some proposals are to reduce it from the current cap of a mortgage of $1 million to allowing it only on mortgages up to $300,000. Other proposals are to eliminate it totally on vacation or second homes as well as on home improvement homes. Still other proposals are to eliminate MID for individuals in the top income brackets since they use the deduction more than lower income buyers. Another proposal is to only allow it for 1st time buyers.
One unique proposal that is gaining support in Washington to save the mortgage interest deduction is to allow it on all mortgages for the next 5 years. Any new mortgage would automatically get the mortgage interest deduction for five years. I know your question is what happens after five years? It’s simple, you buy and move up. With a new home and new mortgage, you get the MID for another five years. This may force people to move every five years (currently, people move on average every 11+ years).
One thing is for sure, the MID will be changing, we just don’t know in what way yet. Smart homeowners will continue to use this deduction as long as they can.