Honey I Shrunk The Mortgage Interest Deduction Plan 1
Below is a MRR and PLR article in category Finance -> subcategory Mortgage.
Honey, I Shrunk the Mortgage Interest Deduction: Plan 1
Overview
The political climate this year has been turbulent, and the proposed tax reforms targeting the mortgage interest deduction are set to intensify the situation.
Tax Reform or Raising Taxes?
A common saying suggests that Democrats are known for raising taxes, while Republicans aim to reform them, yet both approaches often result in us paying more. In a bold move, a bipartisan committee has recommended tax reforms that include reducing the cherished mortgage interest deduction.
President Bush tasked the committee with simplifying the notoriously complex tax code, which continues to expand with an average of two new sections daily. One significant issue is the Alternative Minimum Tax (AMT), originally intended to prevent the ultra-wealthy from evading taxes. Poor drafting has led to its impact on a much broader population. However, the challenge remains: how to replace the substantial revenue the AMT generates?
The committee's solution is to target the mortgage interest deduction. They propose two plans, and we'll focus on the first one here.
Plan 1
Under this plan, the mortgage interest deduction would be linked to the loan amount the FHA supports. Since the FHA aids low-income buyers, the cap would be relatively low. For example, in San Diego, where the average home costs over $600,000, the FHA cap is about $315,000. This change would effectively cut the deduction in half for many homeowners. In high-cost real estate markets, this could lead to widespread mortgage defaults, halting the housing market boom. A decrease in equity might leave many homeowners underwater on their loans, resulting in another financial disaster.
If Congress proceeds with capping the mortgage interest deduction, chaos could ensue. It seems improbable that politicians would adopt such a drastic measure.
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