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When I asked FIRECracker about today’s article, she responded by growling and jabbing at her Chautauqua UK speech, so today I’ll be filling in for her Monday post.
As you all know, I’ve been keeping a pretty close eye on what the American politicians have been up to, not because I particularly care about US politics, but because there have been a lot of things happening that could potentially affect the FIRE community in potentially devastating ways. The most obvious one being Trump’s repeated attempts to repeal and replace Obamacare, attempts I’ve written about here, here, and here.
And while this high-profile will-they-won’t-they drama has been unfolding in the headlines, a quieter effort’s been going on underneath the surface targeting something else that for some reason hasn’t really received a lot of media coverage.
But first, a little background.
The United States (and many Western countries like Canada) have tax policies in place that encourage citizens to own real estate. Why does the government care whether you own? Well, to boost the economy of course! And to that, everyone nods and goes “well yes, that’s obviously a good thing.”
The funny thing is, if you stop and think about why a citizen owning their home rather than renting it affects the economy, it’s actually not that obvious. But leave it to none other than Bill Clinton to explain it in a way everyone can understand.
When a family buys a home, the ripple effect is enormous. It means new homeowner consumers. They need more durable goods, like washers and dryers, refrigerators and water heaters. When we boost the number of homeowners in our country, we strengthen our economy, create jobs, build up the middle class, and build better citizens.
~ Bill Clinton
Ah. Gotcha. Homeowners buy more crap. Now THAT’s a statement we here at Millennial-Revolution.com can get behind.
So governments want people to buy more houses because it encourages them to buy more stuff. And how do they do this? In Canada, we exempt all capital gains for a principal residence from tax. And for the US, they have an even bigger tax break: The Mortgage Interest Deduction.
Basically, the Mortgage Interest Deduction allows Americans to subtract any interest you pay on your loan off your total taxable income. It’s a pretty sizeable tax break, and costs the American government around $80 billion a year. So it’s HUGELY costly.
Here’s the strange thing. Both conservatives and progressives hate it.
Conservatives argue that the Mortgage Interest Deduction messes with the free market and encourages people to purchase things with debt, rather than savings, which as we’ve written before, distorts people’s perception of how much things cost. This is true.
Progressives argue that the Mortgage Interest Deduction primarily benefits wealthier people. This is also true, since people with higher-paying jobs qualify for larger mortgages, and therefore benefit more from a Mortgage Interest Deduction since, you know, their mortgages are bigger and therefore they’re paying more Mortgage Interest.
But because so many people benefit under the Mortgage Interest Deduction, touching it is akin to a political third rail. Touch it and you die. So no politician dares mess with it.
Until now.
Trump administration weighs slashing mortgage deduction
Reducing the mortgage interest deduction would send earthquakes through the real estate industry.
Now, I’ll be the first to admit that I was a completely shocked to read this. And not because this is an overly right-leaning or left-leaning move, because the Mortgage Interest Deduction is somehow neither a left nor right issue. But Donald Trump, regardless of what you think of him as a politician, regardless of what you think of him as a person, I think every single one of us can agree on the statement that Donald Trump is 100% a pro-real estate guy.
I mean, the last three cities I’ve been in (Toronto, Chicago, Panama City) have all had Trump Towers in them. He is a MASSIVE fan of real estate.
Which just makes his decision to take a whack at homeowners all the more confusing.
But peeling back the layers, it’s not totally stupid.
Trump got elected for a lot of reasons, but one of them was the promise to drastically cut corporate taxes. And that’s fantastic. For the stock market, for investors, and for early retirees like us who depend on the continued performance of the S&P500, that was music to our ears.
But then he got mired in the Obamacare repeal-and-replace debacle.
Don’t get us wrong. We’re GLAD he got stuck in the mud when it came to blowing up Obamacare. For the FIRE community, Obamacare is a major pillar of support that’s needed to retire in your 30’s, and our fear was that the elimination of Obamacare would screw over a lot of readers.
But then, the Obamacare repeal effort blew up. All thanks to, and this was a HUGE surprise, Sen. John McCain.
Yeah, that guy. The guy who lost to Obama, and then, with a dramatic thumbs-down on the Senate floor, single-handedly cemented his former rival’s key domestic policy to the annals of history.
So, without the tax savings that repealing Obamacare would have given him, Trump is now forced to dig deep into constituencies that have money, and yet aren’t likely to take to the streets and start marching.
After all, when’s the last time you’ve seen a homeowner march with a sign outside of city hall? It doesn’t happen. They’re too busy working and worrying about their next mortgage payment. So I think Trump’s hoping for a free pass here. Homeowners don’t protest. They bitch and complain about tax hikes, but at the end of the day, they tend not to take to the streets and march for their interests.
But here’s the problem with that strategy. Homeowners? They tend not to march. But they do vote.
So he’s taking a pretty big gamble here, potentially pissing off a very large chunk of people in order to fund his tax cuts. That being said, his original plan to fund this tax cut was to repeal-and-replace Obamacare, which in itself would have pissed off a very large chunk of people. So in a way, I guess his new plan isn’t that different from his old plan. But instead of screwing over poor people, he’s now going to try to screw over homeowners.
It’s an interesting strategy.
And again, this is just a proposal, which is a long way off from a bill that passes through both chambers and gets signed by the President. But oddly enough, if it does go through as is, then Trump will have inadvertently passed policies that directly benefit people who read this blog, namely:
- Keep Obamacare intact. This is good for anyone who intends to retire early.
- Cut corporate taxes. This will keep the stock market rally going, which helps anyone investing in low-cost Index ETFs.
- Whacks homeowners. But who cares? As this blog writes, it’s better to rent and avoid the massive mortgage. No massive mortgage means no massive mortgage interest, which means the Mortgage Interest Deduction didn’t impact you much anyway.
So I don’t know. Maybe Trump reads this blog. God, I hope not. But if he does, this combination of policies is almost a Millennial-Revolution stimulus plan. So…thanks?
So what do you all think? Is Trump going to take a whack at the Mortgage Interest Deduction? Or is this all smoke and mirrors?
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I hope he wacks the mortgage tax deduction. At today’s rates, it takes a lot of home and a pretty high income before you’re able to take the mortgage interest tax deduction, particularly if you’re married. While we were working and making low six figures combined income, we never took the mortgage interest deduction because the standard deduction was always larger than mortgage interest + state taxes + real estate tax.
However if you buy a half million dollar McMansion (the cost of those monstrosities in most parts of the USA) you’ll probably be taking a big fat mortgage that yields a sweet mortgage interest deduction. In other words, hard working middle class taxpayers will be paying for a public housing subsidy for that McMansion owner 🙂 What a misaligned policy decision (ignoring the “yeah but homeowners consume more shit and therefore it’s good for the economy” line of reasoning – but following that logic we should incentive people to buy everything!!! like luxury cars and jetskis).
Even better if you take a $1 million mortgage and earn over $250,000 a year. It’s an awesome benefit that is helping a lot of coastal city Americans not only build a tremendous amount of wealth in real estate, but also to live in a more robust place.
I don’t see how the deduction will never disappear. We we’re in his pockets!
I’m in agreement with Sam. The mortgage interest deduction is just too foundational to Americans to be messed with.
I honestly think that many homeowners WOULD take to the streets if this became real. For many Americans, the value of their home is a *huge* part of their net worth.
They literally invest hundreds of thousands of dollars into home improvements because they consider it an “investment”. Now the government is going to make their property worth less in one fell swoop?
I find it unlikely to happen.
Many companies might even give people the day off *just* to protest.
True, but this is the same guy who tried to take people’s health care away. People did protest, and he still tried to push it through, so I don’t think he particularly cares if homeowners are upset.
Right there with you. Refi’d at 2.625% a couple years ago and I suspect this is the year it stops being worth our while to itemize our taxes. Small mortgage + six-figure household income FTW! Double bonus if he’s successful and it riles up those who voted for him. Not sure what more it’ll take for them to realize the bill of goods they’ve been sold.
It’s difficult for me to work up much sympathy for the McMansioneers. Interest rates are at historic lows, which means BUY SMALL AND PAY EVEN LESS, not buy 4000 sq ft just because you think you can.
You get maybe a 2000 square-foot house for $2 million in places like San Francisco, Manhattan, and Vancouver. They are not McMansions.
I’m starting to think that West coast may in fact NOT be the best coast, Sam 🙂
1 million for a 2000 SQ foot in the nice sunset district.
Send me an example of a link! I’d love to buy it!
Thx so much
You must have owned your house for a while or have a very big family to take a standard deduction that was bigger than the mortgage writeoff! I am a single person in Southern California and I write off the mortgage interest and taxes for my $200K studio condo. The write-off is much, much, MUCH greater than my single-person standard deduction. I will have to pay thousands more in taxes each year without it.
Yeah, the mortgage interest rate deduction is stupid, distorts the market, and mostly benefits the very wealthy.
However, I don’t think scaling it back will ever get through Congress.
Nothing will change. Given the majority of Americans own homes, this legislation will not pass. The mortgage interest deduction and the tax-free profits of up to $500,000 per couple Will live on forever. This is part of the American dream.
Tax relief on mortgage interest for your own home is an alien concept for us in the UK.
I know this is slightly off the subject, but here in Blighty the government are introducing a tax on buy-to-let mortgages. After it is phased in over the next four years any interest portion of the mortgage will go on the balance sheet as income!!! And then the tax you owe on the rental profits will be calculated using the actual profit you make plus the interest you had to pay the bank. So essentially getting taxed on a cost for money you had to pay out. It is perverse!!!
Governments… who would have them?
You have to report interest you pay on a mortgage as income? What?!? Confused.
It could pass if Trump decides to also increase the amount of the standard deduction, so I wouldn’t say it won’t change. As they say in boxing, it has a puncher’s chance. Also, Trump got elected when no one thought he would win. Same applies to the deduction.
Not to mention there are like a gazillion real estate blood suckers/agents in the US. All right, more like 2.5 million, but still, do you think they would let the MID go away that easily without fighting and lobbying tooth and nail? 2.5 million!
Translation: this proposal has zero chance of passing.
Another good read on the MID:
“How Homeownership Became the Engine of American Inequality”
http://tinyurl.com/m3s7rgo
(I think I may have posted that link before. But it is worth another reading.)
I did read that, it was a great article.
I got all excited to take the deduction this year after buying my first property but noooo I don’t pay enough. I say get rid of it. He’s unpopular enough to take the hit and survive. Kinda like the roaches in my tenant’s unit.
Or unpopular enough to not care about the hit.
I actually get why he’s doing it. He needs tax savings from SOMEWHERE, and wherever he takes it from there will be people screaming at him, and since he couldn’t repeal Obamacare he’s taking it from one of the only other buckets available.
Good stuff, Wanderer.
I agree with Sam’s take: I don’t see the mortgage interest deduction going away, even though a large swath of homeowners don’t ever see a benefit from it as their home isn’t expensive enough.
Still, when you have a concentrated benefit and a diffused cost, it’s very difficult to get rid of such a benefit because the people enjoying the benefit are loud and motivated. The people who’d each get a tiny individual benefit by a repeal of the mortgage interest deduction aren’t all that motivated.
Great minds being what they are, I also happened to write on this today:
http://www.donebyforty.com/2017/08/taxes-behavior-and-regressive-incentives.html
Selfish question: do you think this affects REIT’s, which are already soft? Thanks!
Doubt it. Loans taken out to run a businesses are generally deductible everywhere. I don’t think that’s on the chopping block here.
Hm…If the mortgage interest deduction goes away, I wonder if this will improve the market for those looking to purchase investment properties? I could see the disappearance of this deduction lowering interest rates in an effort to still encourage home purchases.
Yeah probably. There are a certain percentage of people out there who believe buying a house = always good because of the mortgage interest deduction, somehow. So if that were gone, it would take those buyers out of the market.
Kudos for communicating this message with balance, transparency, objectivity and without insulting those taking this deduction. As a very high taxpayer who doesn’t have a mortgage, I don’t hate on people who take the deductions available to them. There are many things to consider here. Will removal of the deduction drive rents up? Will they crush the last hopes for many people hoping to buy in San Francisco or New York? There may be unintended consequences that aren’t being considered.
Oh, sure. But “unintended consequences that aren’t being considered” is basically how decisions get made nowadays, so wheeeee!
Well, I just got done writing a paper on Trump. However, I don’t think he will take a swipe at this. However, I wish he would. Even though I think it is a good idea to get rid of it and I own a home. I would prefer a cleaner tax code. Cut deductions, lower rates, and get rid of special interest items. And if you want to create more equity than raise the standard deduction that would satisfy some problems.
Fun with mortgage deductions
https://fivethirtyeight.com/features/the-tax-deductions-economists-hate/
https://www.economist.com/news/briefing/21651220-most-western-economies-sweeten-cost-borrowing-bad-idea-senseless-subsidy
FiveThirtyEight? Hey, I remember them! Isn’t that Nate Silver’s blog where he spent all of 2016 talking about how Trump would never win? Never reading THAT site again.
The second link is from The Economist
To be fair, 538 was one of the only sites talking about how Trump was being underestimated, and that 30% chances (roughly the odds for him winning) came through pretty often: i.e. 3 out of every 10 times.
I’m a homeowner and say get rid of it; it only helps if you itemize your deductions but the more you make the more it gets watered down. In my opinion, it is nothing but a form of bank welfare that encourages people to take on debt and pay more for something than its worth. The financial ignorance with this so called benefit its damn near universal. I’ve talked to fiance people who swear by it but don’t see that for every dollar you pay in interest you only save $.28 if you’r e in one of the higher tax brackets. However, for folks in lower income brackets it does help them buy homes… Time will tell but I’d rather have a higher standard deduction than the MID.
Get rid of the mortgage interest deduction. Heartland taxpayers should not be subsidizing leveraged homeowners in coastal bubble markets. Our tax system is too complicated, it should be simplified.
I’m a San Francisco homeowner.
That’s an interesting way to interpret it, as a way for heartland taxpayers to subsidize the housing decisions of coastal elites. I’ve never thought of it that way.
Now here’s a real estate opportunity:
“Residents of an exclusive San Francisco street didn’t pay their taxes. So someone bought their street.
Tina Lam and Michael Cheng of San Jose said that in 2015 they were look at parcels being auctioned online by San Francisco’s tax office when they saw a description of “this odd property in a great location.”
They bought the land sight-unseen, beating out 73 other bidders and dropped $90,000 for the street and its common areas.
In an expensive city, the homes on Presidio Terrace are in a league of their own. One had an asking price of $16.9 million last year.
Lam and Cheng are now the owners of the common space of Presidio Terrace, which includes its sidewalks, garden islands, leafy palm trees and other lush greenery beautifying the homes of 35 mega-mansions after the association that manages the common areas failed to pay property taxes going back decades.
At $14 a year the debt grew to $994, and the street was sold to recoup additional fees and penalties.
Lam and Cheng could rent out the 120 parking spaces to residents to start making their investment back, an idea suggested by others, the Mercury News reported.”
https://www.washingtonpost.com/news/morning-mix/wp/2017/08/08/residents-of-an-exclusive-san-francisco-street-didnt-pay-their-taxes-so-someone-bought-their-street/?tid=pm_pop&utm_term=.2e3642103823
Sort of unrelated but I think it’s a huge disservice to give ‘all thanks’ to McCain when Lisa Murkowski and Susan Collins were on the frontlines saying No from the beginning. McCain was more dramatic but it gives him way too much credit.
I highly doubt the MID will be eliminated. There will be a revolution here in the U.S.
if it does.
Well, he didn’t end it, but wants to end local/state tax deduction. All deductions should be fair so deductions should be limited to the average local/state tax bill. States that have high local/state taxes shouldn’t be unfairly rewarded because of their zip code.
Obamacare is not the gold standard by a long shot and if anyone thinks a law passed without 1 republican vote should be fixed by republicans is just out of their mind. If it were any other issue and the same were true, democrats wouldn’t touch it. Honestly, I think republicans should just let it run its course given none voted for it. I like the preexisting conditions part of the law, I don’t like that “kids” can stay on their momma’s policy until they are 27 unless they are certified full time students. Kids that at 18 can star in porn movies and can fight with tanks and guns abroad aren’t kids so I really wish the US would sort out when people become adult, because one has to be 21 to buy alcohol in all states and 21 to buy tobacco in other states, but 27 when it comes to insurance.
Don’t upset millionaires that have decided to retire early and use Obamacare as means to supplement their early retirement. Shame, shame, you want to retire early, you should be able to do it on all of your own dollars without decades of taxpayer assistance. You should rely on YOU if you don’t want to work.
Besides all that, Obamacare is absolutely nothing like what they said it would be. A lot of promises were broken so no doubt it will implode on its own if pols just leave it alone.
John McCain is a RINO that is bought and paid for by billionaire donors. He doesn’t care about the American people.
I also wish we’d call illegal immigrants what they are: SLAVES! Yeah, they come here on their own, but they are supposedly here to do job Americans won’t do and that historically means they are slaves. What is left off “job Americans won’t do” is “for slave’s wages.” Pay an America a fair wage for the work required, they will do it. If it takes 25/hr to get Americans to pick vegetables, fine, pay it. If 25/hr will put rich American farmers out of business, fine, let them go out of business. Perhaps, if they go out of business, the businesses/farms and crops will grow in Central America and the people will stay in their communities with their families to pick the crops there instead of working as slaves in another country.
Not much difference between black people picking cotton in 1800s and brown people picking everything else in 2017.
That is more than I ever expected to write, but I’m on a roll.
My house has been paid off for years. Observations in my experience:
1) Mortgage Interest Deduction is overrated. It doesn’t do much, if anything, for you – https://www.invsense.com/single-post/2015/08/28/The-Mortgage-Interest-Deduction-is-Overrated
2) Historic return on housing is 0 percent – https://www.cbsnews.com/news/history-says-home-real-estate-is-a-bad-investment/
If you are going to buy a home and have a job, do yourself a favor and ALWAYS have a business on the side. And I mean register it as an LLC that you own with an expectation of profit. The only way you will probably get that Mortgage Interest deduction is if you itemize above your Standard Deduction and even then it will not be much.
Student loans have deformed college into a monster that did not exist when I was young. Student loans should be made ‘bankruptable’ to fix this problem. But every leftist Democrat in the World is going to beat you to death with their ANTIFA friends to prevent you from destroying their chosen profession – HIGHER EDUCATION. Education is the new opiate of the masses.
Obamacare is just the medical version of student debt with ridiculous premiums enriching a chosen class of medical professionals/insurers.
And I’ll leave you with this, the Government has so much debt itself that it competes with you and every business by borrowing so much money. That is why they flooded the economy with money since 2008. They are trying to inflate their way out of it – and they’ve succeeded so far. Remember when housing prices dropped like a rock in 2007ish? Yeah, that was called deflation. So they went crazy printing money and ‘voila’ here we are back where housing prices were.
But because the government has SOOO much debt – and the economy is growing SOOO poorly – deflation may return with a vengeance. Trump is very correct in his beliefs about the US economy – I hope he can succeed in getting us into a high growth mode to prevent deflation. Disaster may await otherwise.