Did You Know: The mortgage interest deduction (MID) was capped at $1 million in 1987 and not pegged to inflation. If it had been indexed, the MID cap would be over $2 million today.
- In 1987, following tax reform in 1986, the mortgage interest deduction was capped. Only interest on mortgages up to $1 million was deductible. For context, at the time the median priced single-family home was $85,600.
- Many tax parameters are indexed for inflation and the indexing began at a variety of points in time. For example, the earned income credit (1984), the standard deduction (1987), the personal exemption (1988), the tax rate tables (1989), the old phaseout of personal exemptions and limitation on itemized deductions (1990) , the 10 percent bracket (2002) , and the new phaseout of personal exemptions and limitations on itemized deductions, AMT, and 39.6 percent bracket (2013)  are all indexed for inflation. The inflation adjustment ensures that inflationary increases alone do not push tax payers into higher marginal tax rates or erode benefits like the standard deduction.
- While the mortgage interest deduction cap remains unchanged, the price of single-family homes has more than doubled in 25 years even after the house price declines of the Great Recession. In 2012, the median priced single-family home sold was $177,200 (slightly higher than the median priced existing home which sold for $176,800). The most recent monthly price was above $200,000 and given the pattern of price increases, the median priced home sold in 2013 will probably be near that level.
- Financiers often use a “rule of 72 ” to figure out how long it takes something that is compounding to double or how long it takes for purchasing power to be cut in half by inflation. To use the rule, take the rate of return or the inflation rate and divide 72 by that number. In the last 30 years, inflation has averaged about 3 percent. Using the rule of 72, that would suggest that in the last 24 years, purchasing power has been cut in half.
- So while home prices have doubled and purchasing power has been roughly halved, the Mortgage Interest Deduction cap has not budged. If it had been tied to the inflation measure used to adjust other tax items, the MID cap would be over $2 million today.
 Sometimes called the “rule of 70” or “rule of 69.” See here: http://en.wikipedia.org/wiki/Rule_of_72
Margaret Thatcher had many wonderful, short and powerful quips including the oft-said: “Socialism works … until the money runs out.”
The Soviet Union and the whole of Eastern Europe disintegrated precisely as the money ran out. The promised pensions never materialized, with many elderly needing to scrape-by from selling their personal belongings in the street. Many Western European countries today are also realizing that money is close to being tapped out as evidenced by rising budget deficits and debt to unsustainable levels. Government borrowing costs are quite high already in countries like Greece, Cyprus, Italy, Portugal, and Spain.
Were there any quotes related to the housing industry? Yes, indeed. When her Exchequer (an equivalent of U.S. Secretary of Treasury) suggested shaving or getting rid of mortgage interest deduction, Maggie Thatcher quickly replied “over my dead body.” Mortgage interest deduction in Britain therefore remained in place throughout her years as Prime Minister. She also privatized many public housing units so that more people can have stake in ownership and in the country.
However, once she was out of office, Britain eliminated mortgage interest deduction. Some members of Parliament believed, as some in the current U.S. Republican Party have been advocating, that fewer deductions combined with lower tax rates would make the economy more efficient.
The real world never goes the way described in textbooks, or as planned. Today, Britain no longer has mortgage interest deduction. And tax rates are higher (not lower).
According to the most recent public data from the IRS, there were about 144 million US tax filers in 2010. In the same year, the US resident population was 309 million and the number of households was estimated to be just shy of 113 million—with 75 million owner-occupied and the other 37 million occupied by renters. Among owner occupants, roughly 25 million owned homes without a mortgage while the other 50 million reported some type of mortgage on the property. In tax year 2010, about 47 million tax filers itemized and nearly 37 million of those itemizers claimed a deduction for home mortgage interest (MID).
This is a guest blog post by Lora McCray, NAR’s Manager of Housing Opportunity.
Last month the NAR’s Housing Opportunity program released the findings from its 2011 Housing Pulse Survey, which is an annual survey we conduct to gain information on consumers’ attitudes and concerns about affordable housing. We wanted to get a sense, particularly in the current economy, of people’s attitudes about affordable housing opportunities and homeownership and what they expect to see in the future.
There is some talk that the mortgage interest deduction, or some portion of it, is on the table for a cut in the grand bargain over the debt ceiling debate. Here are some figures on the mortgage interest deduction (MID):
- About a third of all Americans itemize their tax deductions instead of claiming the lump-sum standard deductions. Many of these itemizers do so to claim the MID, and the fact that they can claim the MID makes itemizing a better choice for them than the standard deduction. In fact, more than 80 percent of those who itemized claimed the MID.
- More than half of home owners claim the MID. Surprised that the figure isn’t higher? The MID can only be claimed by homeowners who pay mortgage interest, and nearly a third of home owners own their homes free and clear—without any debt. Among mortgaged properties, more than 80 percent claim the MID. The less than 20 percent who do not claim the MID are likely long-time home owners who have nearly paid off their mortgage and receive a larger tax deduction by claiming the standard deduction than by claiming a deduction for the little mortgage interest that they pay.
- Among those who take MID, about two-third of all families earn less than $100,000.
- Homeowners already pay about 80 to 90 percent of all federal income tax.
- Many policy wonks in Washington are calling a cut to MID a virtual cut in government spending because it is a cut in something called tax expenditure. The everyday people will disagree with this type of Washington language because their tax bill will be rising. It is a tax increase for American homeowners.