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Mortgage Interest Credit - Does the Mortgage Interest Credit Work?

home tax homeowners ownership

Over the past few years, a lot of talk has been going on concerning the state of the housing market and ways in which it can be improved so a speedy recovery can be met. Among the debated issues was the, now expired, homebuyer’s credit. The credit was said to be too costly to the government and provide too little to the economy and the homebuyer. A similar debate has been going on for years over the existing mortgage interest credit.

The mortgage interest credit is a government income tax deduction that can be taken by homeowners with loans up to $1 million secured by a primary residence where the funds are used to either purchase, build, or improve the home. The mortgage interest credit can also be taken in cases where a second mortgage of up to $100,000 is taken out for other purposes other than to put back into the home. The interest on these qualifying loans is 100% tax deductible.

The justification of this credit is that it gives a strong incentive for home ownership. Critics, however, argue three strong points against the credit:

• Studies have shown that the credit does not impact the overall rates of home ownership in any significant manner.
• The credit favors higher-income individuals and families.
• The credit only manages to bypass the rules that prohibit deductions for interest on personal loans. Such a credit unfairly favors home owners who use equity in their homes for personal uses.

In reality, the mortgage interest credit was a bone thrown to realtors and the upper/upper-middle class by Ronald Reagan when the Tax Reform Act of 1986 was passed. Before that, all personal loan interest was tax deductible. Reagan fought to preserve the deductibility of mortgage interest, supposedly, as a symbolic gesture to the American Dream. All studies conducted have shown no increase in home ownership due to the mortgage interest credit. Furthermore, most homeowners don’t even claim the credit because it requires the taxpayer to make itemized deductions instead of taking the standard deduction. Most low-income homeowners take the standard deduction because it is more beneficial to them overall. At the same time, wealthy homeowners are getting huge tax breaks on their million-dollar homes.

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