This post was contributed by a community member. The views expressed here are the author's own.

Business & Tech

Agent: Mortgage Interest Deductions on Houses Help Owners--Something to Consider on Tax Day 2011

On Tax Day, it's good to look back on the federal income tax and mortgage interest deduction. There are some who want to end it to help the federal budget deficit.

Since Monday is officially Tax Day this year, it is a perfect time to look at how the federal income tax came to exist and how it affects homeownership.

The federal government passed legislation in 1894 marking the beginning of tax interest deductions. Although the law was subsequently struck down by the Supreme Court, it led to the ratification of the Sixteenth Amendment in 1913.  Originally this gave Congress the power “to lay and collect taxes on incomes, from whatever source derived.”

Congress believed that interest was a business expense. The goal was to tax a business on its profits after all of the expenses had been deducted. At the time, our country was composed of small businesses and it was difficult to separate business income from personal income, so any interest became deductible.

Interested in local real estate?Subscribe to Patch's new newsletter to be the first to know about open houses, new listings and more.

According to Wikipedia, a New York Times article notes that in 1913 Congress “certainly wasn’t thinking of the interest deduction as a stepping stone to middle-class homeownership, because the tax excluded the first $3,000 (or for married couples, $4,000) of income, less than 1% of the population earned more than that.”

Until the 1920s, most homeowners owned their homes outright. It was only in the 1930s, with the creation of the Federal Housing Administration and Fannie Mae (Federal National Mortgage Association), which insured 30-year loans, that mortgages increased. Instead of making loans that the banks had to wait for borrowers to repay, banks could now sell their loans and reissue new ones.

Interested in local real estate?Subscribe to Patch's new newsletter to be the first to know about open houses, new listings and more.

Today, the mortgage interest deduction is considered a mainstay of the housing market. Individuals can deduct the interest on mortgage debt of up to $1 million on a primary residence and a secondary one combined. There is also an allowance for interest deduction on a line of credit debt up to $100,000. 

Because of the decline in the economy, some economists believe that the home mortgage deduction should be eliminated as one way to improve budget deficits. It is also believed by some that the mortgage interest deduction benefits primarily the wealthy. This may be a misconception. According to Lawrence Yun, National Association of Realtors chief economist, 65 percent of families that claim the mortgage interest deduction earn less than $100,000 and 91 percent earn less than $200,000.

Mortgage interest deductions have become a mainstay in this country. Eliminating them would put a strain on millions of Americans who bought their homes with the understanding that mortgage interest is tax-deductible and have been paying down their mortgage to help build equity. Tax benefits help people begin building their futures through home ownership.

“Realtors see the very real positive impact of home ownership every day with our clients,” National Association of Realtors President Ron Phipps said. “Recent proposals to reduce or eliminate the mortgage interest deduction and remove government support of the housing finance market could have disastrous consequences for the economy, not to mention making it harder or nearly impossible for millions of families to own their own homes. We believe America must continue to invest in home ownership, for the future of our families and our nation.”

The mortgage interest deduction helps people purchase a home, and homeowners are good for the community. Homeowners are concerned about safety, schools and positive development. 

There have been several task forces formed to revamp the tax system. With all deductions under review, the mortgage interest deduction could be eliminated or reduced. If you support the continuation of the mortgage interest deduction, let your federal lawmakers in Congress know. Call or email your thoughts and concerns. 

Joan Probala is the managing broker for Issaquah Windermere (Windermere Real Estate/East Inc.). She has 30 years of experience in real estate, construction and sales.

We’ve removed the ability to reply as we work to make improvements. Learn more here

The views expressed in this post are the author's own. Want to post on Patch?

More from Kirkland