> 1. What about the property tax deduction? Why are property taxes deductible, but income taxes are not?
There's no objective reason why it should be. But since deductions are largely arbitrary policy instruments anyway - because property tax deduction encourages and makes easier home ownership (at least this is the theory) and the government wants more home ownership. State tax deduction does not really have such goal (unless you see moving people to high-tax states as a goal, but I don't think federal government identifies such goal).
> 2. How do you feel about the mortgage interest deduction? A very similar question could be asked.
Same as above. Only much bigger - given 20% down mortgages, mortgage interest - especially for new mortgages on standard equal-payment plan - is very substantial. So, tax deduction makes owning home easier - and, on the reverse, removing this deduction would seriously hurt current mortgage owners and discourage new ones.
The difference here is that with property-related taxes there is a policy goal linked to it, and also long-term choice individuals make based on this policy, which would make them very upset if the policy changes. With state taxes, there's no real policy goal (for federal government at least) and most people don't choose state to live it because of state tax deduction.
> Could you explain how the mortgage interest deduction doesn't help homeowners?
The mortgage interest deduction helps mortgage lenders by subsidizing mortgages, which increase demand for them; and it helps people who owned homes when it was passed by increasing the market-clearing price of homes. It doesn't help people become home owners, and people who become homeowners while it exists are hurt as much as helped by it, but would face a one-time additional hit if it ended (both from increased total mortgage cost and the decreased home value because buyers would no longer be subsidized.)
Essentially, the deduction increases the nominal price of homes by encouraging (compared to not having the deduction) getting into and remaining in debt to own them.
> There's a lot of tax advantages that you get by owning a home as well.
If adding together mortgage interest paid for 12 months + property taxes paid for the year together is less than the $12k single filer standard deduction, are there any tax benefits to owning a home?
> Mortgage interest tax deductions for homeowners are essentially a wealth transfer from taxpayers to banks and homeowners.
Are corporate loan interest payment deductions also a transfer from taxpayers to banks and companies? Do you propose disallowing that as well? If you don't, you place corporate landlords at a distinct advantage over individual homeowner consumers.
If you do propose eliminating corporate interest deduction, that has huge implications on many industries where borrowing is commonplace (and arguably necessary to start a new venture).
> Is it not also the case that interest payments on a residential mortgage are tax deductible in the US?
They are only if you itemize your taxes nowadays. During the Trump administration the tax law changed so that the vast majority of Americans now take the Standard Deduction. I received the mortgage interest deduction for about 15 years but haven’t received it for 5-6 years now.
> I expect the deduction to disappear in the near future as most people discover it doesn't apply to them only the rich.
Nah. Two big reasons I can think of: people don't understand tax policy and wealthy people benefit (just less so in Blue states).
The first point is pretty straight forward. Lots of people talk about how things are "tax deductible" without even considering whether or not the deductions apply to them. Even if the IRS published that 85% (number made up) of people took the new standard deduction, thus used no deductions, you'd be hard-pressed to convince most people to get rid of the mortgage interest deduction. People in general (even smart ones) are just irrational when it comes to tax deductions.
Secondly, the mortgage interest deduction is still used by relatively wealthy people. A $600k mortgage generates >$16k in interest payments in the first year, even at the low rates we have today. That's easily enough to clear the standard deduction (for a single person). For married people, the hitting the SALT limit with that mortgage is enough to cross the threshold.
> If you own you’re paying mortgage interest and real estate taxes and both are tax deductible
Side note - As I understand it, you cannot deduct either of those if you take the common standard deduction. In high cost of living places I am told that these deductions do outweigh the standard deduction.
> I also learned recently that the realtor lobby has fought hard to keep the mortgage interest tax deduction which helps home owning persons but hurts everyone else.
> Why am I able to use my single rental as a tax shelter?
The tax deduction is only available on your primary and secondary residences. (Where secondary here refers to a second home, not a third, etc.) You don't get to claim a primary or secondary residence mortgage interest deduction on your rental properties, because you aren't living there.
This arose out of a previous law that generally allowed for the deduction if interest on all loans because it was administratively unfeasible to differentiate between business and personal interest expense (or so said the wisdom at the time). Even today, business interest expenses are generally deductible. This is wholly separate from the mortgage interest deduction, which is for owner-occupied homes.
>> The government lets you deduct your mortgage interest from taxes
>
> This is effectively not true anymore.
Care to explain? Is this because the standard deduction is so high, it's generally not worth itemizing for most people since the Trump tax system adjustment? Genuinely curious; I'm a current renter, hopefully purchasing in the next couple of years. But this is an important part of the buying calculus.
> If you have a mortgage, you can deduct the interest. I think most people are in this category
That's true, but you need to have other deductions or a fairly large mortgage for it to be worth taking that deduction instead of the standard deduction. Most people are better off with the standard deduction.
I think you're referring to the tax credit for mortgage interest payments?
If so ... this subsidy ironically only applies to those carrying the largest mortgages. During the Trump administration, the standard deduction was doubled, which means that (a) many, many people who used to itemize (and thus include mortgage interest payments) would no longer do so (b) this deduction somewhat levelled the playing field between median renters and median mortgage holders.
To have enough mortgage interest payments that you can itemize deductions implies a very substantial mortgage. $500,000 @ 4% only gets you to $20k of mortgage interest in a year, not enough (by itself) to make you itemize.
1. What about the property tax deduction? Why are property taxes deductible, but income taxes are not?
----
2. How do you feel about the mortgage interest deduction? A very similar question could be asked.
Two families both make $250,000 a year. One took out a $750k mortgage and one took out a $300k mortgage. Why should the second family carry more of federal tax burden than the first?
I don't have the right answer, but it's something to consider.
> So, you're telling me that the $1MM home (which will be roughly $5600/mth) will give you nearly $20k in tax deductions
Something like that.
Federally, local property taxes and mortgage interest on the first $1 million of principle for first and second mortgages for your primary residence are deductible from your income. For California, the rules are slightly different, but I think that they are close enough to use the same rules for estimation purposes.
Using the interest rates from your example that would be a deduction of 4.5% * $800k + 6.5% * $100k = $39.7k for the mortgage interest deduction and roughly $12.5k for the property tax deduction for a total deduction of $52.2k. If you can afford a million dollar house, you are probably in either the 28% bracket or the 33% bracket for federal taxes and in the 9.3% bracket for California taxes so that will save you $14.6k-$17.2k on federal taxes and $4.9k on California taxes.
People say this but do they know what it means? It's not like the "woooo, free money!" people make it out to be. You are spending a lot of money and saving a little bit of money. It's only a very significant decrease in taxes if you pay a real lot in interest and have high property and income tax.
In my experience buying a house saved me only about a whopping $500 in taxes the first year. And you better fucking believe that $500 went right back into the house in the form of maintenance and upkeep.
Furthermore,
You don't get the mortgage interest deduction if you don't itemize and take the standard deduction instead. Due to new tax laws the standard deduction after 2017 is so high it will be taken by 97% (IIRC) of Americans. So mortgage interest deduction is totally irrelevant from 2018 on.
One of my biggest concerns with putting the vast majority of my wealth in my house is a lack of asset diversion and if it causes you to negligent the tax advantages of contributing to retirement account. ESPECIALLY when your in your 20s, that's when compound interest work most of it's magic.
(1) Personal Property Taxes also do this. Does you state not have these? (Jealous). Just saw more of your post, wasn't aware of lack of reassessment. Not sure that's the case for me.
(2) I'm sure deductible mortgage interest is a thing because the government has determined it's better to own a home (to them) than to rent it. Much better than "owning" credit cards and getting a break on those once a year. Plus you've got phase-outs when doing taxes, etc. Of my student loans, only a small fraction of them get a deduction on interest, regardless of how many other ones I have.
> OK, so lets say this is a bad idea and you should instead
> not have any savings in that case, and make all of your
> savings into payments on your mortgage interest. You're
> saying we could model that by assuming you are making
> periodic risk-free 5% (or whatever) investment instead.
Exactly.
> I get what you're saying but a tax deduction can never
> completely offset the interest payment right?
Agreed, but I just meant that the more mortgage interest you pay the more you save on taxes, not that the interest is totally offset or anything.
There's no objective reason why it should be. But since deductions are largely arbitrary policy instruments anyway - because property tax deduction encourages and makes easier home ownership (at least this is the theory) and the government wants more home ownership. State tax deduction does not really have such goal (unless you see moving people to high-tax states as a goal, but I don't think federal government identifies such goal).
> 2. How do you feel about the mortgage interest deduction? A very similar question could be asked.
Same as above. Only much bigger - given 20% down mortgages, mortgage interest - especially for new mortgages on standard equal-payment plan - is very substantial. So, tax deduction makes owning home easier - and, on the reverse, removing this deduction would seriously hurt current mortgage owners and discourage new ones.
The difference here is that with property-related taxes there is a policy goal linked to it, and also long-term choice individuals make based on this policy, which would make them very upset if the policy changes. With state taxes, there's no real policy goal (for federal government at least) and most people don't choose state to live it because of state tax deduction.
reply