Tax Reform – Limit of Mortgage Tax Deduction

Proposed Tax Reform: Limit on Mortgage Interest Deduction

Introduction

Following his re-election, President Bush embarked on an ambitious reform agenda, aiming to overhaul social security and the tax code, among other priorities. However, the implementation of these reforms has proven more challenging than anticipated. While some areas, such as social security, have seen setbacks due to political pressure, tax reform faces similar hurdles.

Tax Reform Committee's Proposal

The bipartisan tax reform committee appointed by President Bush has put forward several recommendations. While the elimination of the Alternative Minimum Tax is a welcomed proposal, the committee's plan to limit the tax deduction for mortgage interest has raised significant concerns.

Limitations on Mortgage Interest Deduction

Although the final recommendations are pending, early leaks suggest that the committee intends to restrict the mortgage interest tax deduction. The proposed change would limit the deduction to the percentage of any loan that the Federal Housing Administration (FHA) would insure. This means that taxpayers would only be able to deduct interest on the first $315,000 of a mortgage.

Additionally, the committee is considering eliminating the deduction for property taxes altogether.

Economic Implications

The proposed reforms could have severe economic repercussions. The real estate industry, which has been thriving, would likely suffer a significant downturn. In many parts of the country, including regions like San Diego where the average home price exceeds $600,000, the proposed $315,000 cap would drastically reduce the amount of interest that can be deducted. Homeowners who rely on interest-only loans to afford high-priced properties could face financial strain and increased risk of default.

Political and Public Response

The potential changes have faced backlash from various stakeholders. Developers, homeowner associations, and other affected parties have expressed strong opposition to the proposed tax reforms. The pushback highlights a broader frustration with politicians who, critics argue, fail to grasp the intricacies of the housing market and its impact on the economy.

Conclusion

The proposed limits on mortgage interest deductions and the elimination of property tax deductions could have far-reaching consequences for homeowners and the real estate market. If these changes concern you, consider joining the effort to challenge this proposed tax reform and advocate for policies that support the housing market and homeowners.