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It’s not like the housing market needs any more headwinds, so here’s the government potentially giving us another: The mortgage interest deduction is back in big play in the budget deal.
It never exactly came off the table, but the bigger the budget deal, the more likely the mortgage deduction will take a bigger hit.
Right now, home loan borrowers can deduct the amount of interest they pay on their mortgages from their taxable income. This goes for principal residences and second homes. The interest deduction is capped at the first million dollars of debt on the home. For home equity loans it’s capped at $100,000 in debt.
The deduction costs the U.S. Treasury about $100 billion a year. There are proposals now to either reduce the cap to $500,000 and/or to eliminate the deduction on second homes. Eliminating the deduction on second homes would save about $15 billion, and reducing the cap to $500,000 would save another $15 billion, according to economist William Wheaton at MIT. 10.5 percent of existing home sales in June were of homes over $500,000 according to the Mortgage Bankers Association.
Then there’s the idea from the President’ bipartisan commission of turning the interest deduction into a 12 percent credit, limited to $500,000 in mortgage debt, only on primary residences. That could save the Treasury $65 billion.
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