Why Now’s the Time to Kill the Mortgage Interest Deduction: Lennar Corporation (LEN), Toll Brothers Inc (TOL)

Page 1 of 2

The fiscal-cliff compromise on New Year’s Day made substantial changes to existing tax law and permanently implemented a number of decade-old tax breaks for the vast majority of taxpayers. Yet even though some lawmakers have argued that the tax increases they agreed to marked the full extent to which they were willing to concede for the sake of higher government revenue, many believe that further revenue-generating measures may come in future battles over sequestration, the debt ceiling, and the passage of a federal budget.

OIs the Market Wrong About Lennar Corporation (LEN)'s Earnings?ne place that many policymakers have looked to as a potential source of revenue is to eliminate the mortgage interest deduction. With the housing market having suffered so greatly in the past five to seven years, fears that taking away the deduction would lengthen housing’s decline deterred lawmakers from seriously considering cutbacks on mortgage interest. But if there were ever an ideal time to get rid of the deduction, it’s now, because a number of factors are lining up perfectly to make its disappearance as painless as it’s ever going to be.

What the deduction means
In simple terms, the mortgage-interest deduction allows taxpayers to write off the mortgage interest they pay as an itemized deduction. Interest on up to $1 million in mortgage debt is generally deductible, with the deduction available either for a principal residence or a second home.

The mortgage-interest deduction is a relic from pre-1986 tax law. Before then, all interest on personal loans was deductible, but the Tax Reform Act of 1986 took away deductions on interest on credit cards and most other personal debt, leaving mortgage loans as a concession to encourage home ownership.

Why now’s the right time to kill the deduction
Proponents of the deduction argue that it’s a key component to keeping home prices up. Especially in high-cost areas, the amount of interest has historically been quite significant, and the deduction can cut interest costs for high-income taxpayers by more than a third. Given what many perceive as the fragile state of the housing recovery, eliminating a tax deduction on mortgage interest could throw housing back into a dive.

Yet when you look at some of the factors that have driven the housing recovery, it’s far less clear what impact getting rid of the mortgage-interest deduction would have. Consider the following:

  • Mortgage rates are still near all-time lows, with 15-year mortgages available for less than 3% and 30-year mortgages hovering well under 4%. As a result, thanks to depressed home prices and low rates, the amount of interest you’ll pay is lower than ever and may not even save you anything on your taxes. For a $400,000 mortgage at 3%, you’d pay roughly $12,000 in interest. That’s actually less than the standard deduction of $12,200 for joint filers in 2013, meaning that if the only expense you can itemize is your mortgage interest, you won’t get any benefit at all from the deduction.
Page 1 of 2
Comments
Insider Monkey Small Cap Strategy
Insider Monkey Small Cap Strategy

Insider Monkey beat the market by 52 percentage points in 24 months. Our beta is only 1.2 (don't click this link if beating the market isn't important to you).

Lists

The Best B-Boy Movies

Most Awesome Hip Hop Documentaries

Foods That Stain Your Teeth

Richest Doctors in the World

The Best Movie Sountracks Ever

The Highest Grossing Musicals on Broadway

The Most Successful Reality TV Stars

Cheapest Cities to Visit in the US

Most Expensive Summer Camps

Most Expensive Animals in the World

Most Expensive Specialty Crops in the World

Movies That Took Ages to Make

The Longest Hollywood Films Ever Made

Most Expensive Concert Stages

The Richest Bands of all Time

10 Most Corrupt Countries 2013 List

10 Countries with the Highest Quality of Life Index

Most Expensive Mattresses in the World

5 Smallest Countries by Land Area

The Ultimate Heartbreak Songs

Richest Teenagers in the World

10 Most Haunted Places in America

10 Best Places to Retire in Florida East Coast

Top 10 Places to See Before You Die

Top 8 Countries in the World Where Justice Prevails

10 Richest States in America

15 Wealthiest Countries in the World

Richest Singers in the World

Most Expensive Tasting Menu in New York City

Most Expensive Baby Items in the World

Most Expensive Hotel Suites in Vegas

Most Expensive Brunch in New York City

Most Expensive Beef Cuts in the World

25 Best Colleges to Get a Job

Top 10 US Supermarkets

The 25 Most Dangerous Cities in the World to Visit

Most Expensive Xbox Games

Top 11 Cities Where Billionaires Live

Top 10 Most Charitable Companies in America

Most Expensive Seafood in the World

The 10 Wildest Conspiracy Theories

The 10 Best Job Markets in the US

Top 10 Accounting Scandals of All Time

The 25 Biggest Cities in the World

Top 10 Best Paying Virtual Jobs

Most Expensive Leather Shoes in the World

Top 6 Things to Buy in March

The 10 Most Stressful Jobs in America – 2014 List

Top 10 Jobs for Introverted People

Top 10 Honeymoon Destinations in the World

Subscribe

Enter your email:

Delivered by FeedBurner

X

Thanks! An email with instructions is sent to !

Your email already exists in our database. Click here to go to your subscriptions

Insider Monkey returned 47.6% in its first year! Wondering How?

Download a complete edition of our newsletter for free!