“Capping Itemized Deductions and the Housing Market”
It’s the silly season all over our country. Politicians hoping to capture our vote with as little useful policy information as possible. A local DJ suggested a drinking game for debate watchers. Everytime a candidate mentioned the middle class, you had to take a drink. Not a game for light weights.
Since none of the Presidential cadidates directly addressed how their policies will affect housing, let’s take a look at how capping deductions will affect the various classes. Governor Romney suggested capping deductions at $25,000, up from his original plan of a $17,000 cap. According to the IRS, 49% of all deductions are housing related, so who really pays if deductions are capped and at what level does the middle class get ground down even further?
Most lower income earners aren’t affected by either cap because they don’t usually itemize. It’s those earning $50,000-$200,000 (the middle classs) and high income earners, bringing home more than $200,000 a year, who stand to pay more. A recent study shows this could lead to a further deterioration of home prices in higher cost areas.
IRS studies conclude that households earning between $50,000 and $200,000 take an average of $24,000 in deductions, with the majority (56%) of their deductions being housing related. Younger buyers, still in the early stages of their mortgages, typically claim the largest housing deductions since most of their payments are applied towards interest. Higher income earners deduct more for state and local taxes than housing related items.
How can we contribute to deficit reduction without making home ownership in higher cost areas less affordable for the middle and upper classes? Why not cap middle class deductions at a higher rate than high income earners or, as I’ve heard suggested on CNBC, do away with the mortgage deduction for interest on 2nd homes and investment properties? What’s your suggestion?
Did you know that in most markets, it’s still 45% cheaper to buy a home than it is to rent? If you want to explore the benefits of homeownership, call, text, or email me and let’s get the dialogue started.