Will Mortgage Interest Deduction be Caught in Debt-Ceiling Crossfire?

The Mortgage Interest Deduction could come under debt-deal fire as President Obama and Congress struggle to come to budget terms, according to reports last week.

Capping the MID and eliminating it for second homes and home equity loans is being discussed, according to a report by National Mortgage News that cited “industry officials.”

A change in the MID is part of a deal currently being discussed by the president and Speaker of the House, John Boehner, National Mortgage News reported.

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Currently, the mortgage interest deduction is capped, with the ability to write off interest paid on second homes and home equity lines of credit.

With the mortgage industry being strongly against altering the MID, Glen Corso, managing director of the Community Mortgage Banking Project told National Mortgage News that changing it now would damage an already weak housing and lending environment. “Home sales are very slow right now,” he said. “Is this really the time to start talking about doing this?”

Read the article from National Mortgage News.

Written by Elizabeth Ecker

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  • The mortgage interest deduction (“MID”) has never been capped at $1,000,000.  The MID is complicated. 
     
    The MID has two components, acquisition indebtedness (AI) interest and home equity indebtedness (HEI) interest.  Total AI cannot exceed $1,000,000; i.e., the qualified debt itself cannot exceed $1 million.  Except perhaps for reverse mortgages, it is rare for the AI interest component of the MID to ever exceed $100,000.  On the other hand again except for reverse mortgages, it is rare for the HEI interest component of the MID to exceed $10,000.  So it is rare that the MID would exceed $110,000 although it could especially when it comes to reverse mortgages since several years of interest can be deductible in one tax year. 
     
    As to AI, the law states at Internal Revenue Code section 163(h)(3)(B): 

    “Acquisition Indebtedness (i)  In General The  term “acquisition indebtedness” means any indebtedness which—
      (I) is  incurred in acquiring, constructing, or substantially improving any
          qualified residence of the taxpayer, and
      (II)is  secured by such residence.
    Such term also includes any  indebtedness secured by such residence resulting from the refinancing of  indebtedness meeting the requirements of the preceding sentence (or this sentence);but only to the extent the amount of the indebtedness resulting  from such refinancing does not exceed the amount of the refinanced  indebtedness.
    (ii)  $1,000,000 Limitation
    The  aggregate amount treated as acquisition indebtedness for any period shall  not exceed $1,000,000 ($500,000 in the case of a married individual filing  a separate return).”
     
    If total AI exceeds $1,000,000, then the taxpayer must choose the debt which totals $1,000,000 and deduct the interest related to that debt for AI interest purposes.  Any debt which is otherwise AI but the interest related to it is not eligible for deduction because of the AI $1 million limit can be treated as HEI for purposes of the $100,000 HEI debt ceiling.
     
    The law does permit the taxpayer to use up to two homes in computing MID.  Does it make sense to end this portion of the “Congressional expenditure?”  Perhaps BUT only at some time in the future.  (MID in Congressional budgetary parlance is classified as an “expenditure” since the tax benefit is a true government give away).
     
    HOWEVER, with the current mess the housing market is in, cutting back or eliminating this deduction will add greater pressure to the problem.  The MID was created in cooler times and should be preserved in whole.  The MID was substantially cut down in the late 1980s and does not need any further pruning. 

      • Elizabeth,
         
        I apologize if my comment was too abrupt or gruff.   My anger is not with you in the least.  You are doing just fine.  Please keep up the good work. 

        When Congress tried to cut the MID back decades ago they over complicated the entire idea behind the MID.  Unless you had to deal with it on a daily basis for long hours 13 weeks out of the year every year, it is impossible to remember.

        Getting it wrong is something I put on Senator Packwood (R-OR) and Representative Rostenkowski (D-IL), not you.  News reporters rarely get it right.  But it is not just the MID which is confusing; it is a number of interest deductions Congress has managed to complicate.
          

      • Not at all! The context is very helpful and is a benefit to all of our readers.
        Elizabeth

  • The mortgage interest deduction (“MID”) has never been capped at $1,000,000.  The MID is complicated. 
     
    The MID has two components, acquisition indebtedness (AI) interest and home equity indebtedness (HEI) interest.  Total AI cannot exceed $1,000,000; i.e., the qualified debt itself cannot exceed $1 million.  Except perhaps for reverse mortgages, it is rare for the AI interest component of the MID to ever exceed $100,000.  On the other hand again except for reverse mortgages, it is rare for the HEI interest component of the MID to exceed $10,000.  So it is rare that the MID would exceed $110,000 although it could especially when it comes to reverse mortgages since several years of interest can be deductible in one tax year. 
     
    As to AI, the law states at Internal Revenue Code section 163(h)(3)(B): 

    “Acquisition Indebtedness (i)  In General The  term “acquisition indebtedness” means any indebtedness which—
      (I) is  incurred in acquiring, constructing, or substantially improving any
          qualified residence of the taxpayer, and
      (II)is  secured by such residence.
    Such term also includes any  indebtedness secured by such residence resulting from the refinancing of  indebtedness meeting the requirements of the preceding sentence (or this sentence);but only to the extent the amount of the indebtedness resulting  from such refinancing does not exceed the amount of the refinanced  indebtedness.
    (ii)  $1,000,000 Limitation
    The  aggregate amount treated as acquisition indebtedness for any period shall  not exceed $1,000,000 ($500,000 in the case of a married individual filing  a separate return).”
     
    If total AI exceeds $1,000,000, then the taxpayer must choose the debt which totals $1,000,000 and deduct the interest related to that debt for AI interest purposes.  Any debt which is otherwise AI but the interest related to it is not eligible for deduction because of the AI $1 million limit can be treated as HEI for purposes of the $100,000 HEI debt ceiling.
     
    The law does permit the taxpayer to use up to two homes in computing MID.  Does it make sense to end this portion of the “Congressional expenditure?”  Perhaps BUT only at some time in the future.  (MID in Congressional budgetary parlance is classified as an “expenditure” since the tax benefit is a true government give away).
     
    HOWEVER, with the current mess the housing market is in, cutting back or eliminating this deduction will add greater pressure to the problem.  The MID was created in cooler times and should be preserved in whole.  The MID was substantially cut down in the late 1980s and does not need any further pruning. 

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