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Tuesday, January 1, 2013

Don’t Believe Reports that the Mortgage Interest Deduction Might Be Eliminated

[Published Jan. 3, 2013, in the Denver Post and in four Jeffco weekly newspapers]

There is continued talk in D.C. about including the mortgage interest deduction (“MID”) among those deductions and “loopholes” that might be eliminated. Rarely, however, is it pointed out that the mortgage interest deduction, as it exists currently, is already an example of progressive taxation.

In other words, the MID favors the lower income tax brackets over the higher income brackets.  Congress will never, in my opinion, eliminate the mortgage interest deduction entirely. At most it will change the amount of mortgage interest that can be deducted — and the deductibility of mortgage interest on second homes.

Currently, one can only deduct the interest on the first million dollars of home acquisition debt on up to two residences. Up to $100,000 of home equity debt qualifies for tax deductibility.  Of course, the rules are far more complicated than that, so do a web search, as I did, for “mortgage interest deduction rules” to learn the finer points of this tax deduction’s rules.

The “bottom line” is that the mortgage interest deduction is not an all-or-nothing affair.  It is inconceivable that Congress would vote to eliminate this tax “loophole” but rather make it more progressive than it already is.  Lower and middle income taxpayers can count on it not being eliminated for them. Any adjustment of the rules will impact only higher income taxpayers.

This doesn’t mean that interest on investment property is in danger of losing its deductibility. Interest is a business expense when it applies to investment property and is deductible in and of itself on Schedule E, where you list your rental income and deduct your operating expenses — including interest on the financing of your investment.

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