Tuesday, December 18, 2012

TAXES: Loss of mortgage deduction would be hard hit in Mass.

The generous mortgage-interest tax deduction that homeowners have long enjoyed could be diminished or eliminated as part of efforts to reduce the federal deficit, disproportionately hurting Massachusetts and other regions where real estate is especially costly.

Proposals to change the deduction include limiting it to the 28 percent tax bracket and lower; converting the deduction to a less generous tax credit; reducing the maximum allowed mortgage balance from $1.1 million to $500,000; and eliminating the benefit for second homes and equity loans, according to the Brookings Institution, a Washington, D.C., nonpartisan think tank.

More broadly, there is talk of placing a cap of between $25,000 and $50,000 on all annual deductions, which would force higher-earning taxpayers to prioritize what to itemize on federal returns.

Mark Muro, policy director of Brookings’ Metropolitan Policy Program, said changes to the century-old tax break are probably on the way — either as part of ongoing talks in Washington, D.C., between congressional leaders and President Obama to avoid the so-called fiscal cliff, or sometime next year.

“This is moving rapidly from the unthinkable to the inevitable,” Muro said.

But he does not believe it will have a devastating effect on most homeowners. The costs of minimizing or dropping the deduction, he said, “are largely going to be borne by those who can afford it.”

Taxpayers in expensive areas such as Boston and San Francisco reap the greatest benefit because they tend to carry higher mortgage debt and are more likely to file itemized returns.

Only about 25 percent of US taxpayers claim the deduction, which is projected to cost the federal government $100.9 billion in uncollected revenue for fiscal year 2013, according to the Brookings Institution.

About 31.4 percent of Massachusetts taxpayers write off mortgage interest, according to the Tax Foundation, a Washington, D.C, nonprofit. On average, Massachusetts homeowners are able to lop $11,366 from their income, compared with $10,640 nationwide, according to the

How much taxpayers save as a result depends on their income bracket, but it can be substantial. For example, homeowners with a $200,000 mortgage and a 4.5 percent interest rate over 30 years could shave $3,500 from their federal taxes the first year, according to the National Association of Realtors. The real estate trade group and the National Association of Home Builders are taking the lead in the fight to keep the benefit, urging homeowners to deliver that message to their congressional representatives.

Marybeth Mills Muldowney, a Norwell real estate agent, said she is panicking over the possibility that the deduction for mortgage interest will be changed or eliminated, and has joined a national campaign to save the tax benefit.

“There are a lot of people who have no idea about the possibility of the mortgage deduction going away,” said Muldowney, owner of TradeWinds Realty Group. “This is a serious issue and it’s real money out of their pockets.”

The mortgage deduction has traditionally been cited by real estate professionals as a reason why people buy a home instead of renting. It was created in 1913 to boost homeownership.

John Ranco, an agent with Hammond Residential Real Estate in the South End, is stunned that anyone would think about meddling with something so crucial to housing market stability, especially in the Boston region.

Ranco said a hefty mortgage loan balance is not necessarily a sign of affluence, but simply reflects the reality of buying property here. Many Massachusetts residents with relatively modest homes struggle to pay their bills, he said.

The median sale price for a single-family home in the Boston area reached $365,800 during the third quarter of this year, almost double the US median, according to the National Association of Realtors.

“That is not a rich person,” Ranco said of someone who buys at the median-price level. “That is a person who is often just starting out.”

Already, Muldowney said, one of her clients has backed out of putting her house on the market; she can’t afford a larger home without the tax deduction so she does not want to take a chance.

But many economists contend the tax provision was ill-conceived. It unfairly benefits wealthier people, they say. The Brookings Institution calls it one of the most “regressive tax subsidies in the US.”

Guy Cecala, chief executive of the trade website Inside Mortgage Finance, said there is widespread support in Congress to modify the code, if not eliminate it altogether. Cecala agrees with economists who say concerns about revamping the code are overblown. Low interest rates — not the deduction — are the prime attraction for buyers these days, he said.

Matthew Weinzierl, a Harvard Business School professor, said doing away with the deduction could put downward pressure on housing prices in Massachusetts. But if the action is part of a broader financial reform, he added, falling values could be offset by improved consumer confidence.

“Eliminating the mortgage interest deduction is not a policy choice in a vacuum,’’ Weinzierl said. “Some spending has to be cut and some taxes have to rise for our fiscal situation to be healthy. The [deduction] is a good place to start.”

Paul Willen, economist for the Federal Reserve Bank of Boston, said some borrowers would find themselves with less money at the end of the year, but overall the deduction is not a big economic driver.

“This is a real huge subsidy to rich people,” he said. “If we are tightening our belts, then you say maybe this is the expenditure we just can’t afford anymore.”


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