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November 3, 2005
George Bush Wants My Family to be Homeless
We have to admit we've been trying our best to block out the news over recent weeks of President Bush's proposal to do away with the home mortgage deduction--we get a pit in our stomach whenever we think about it. Like many recent purchasers of homes in hot coastal markets (which, by no coincidence are teeming with Liberals), elimination of this tax break would have a fairly drastic effect on our ability to stay in our home.
The pundits are talking about how such a change would bring home values down by 10-20%, but we think they are only taking into consideration the change in demand; in markets like New York, where many people have stretched over recent years to buy a home, the result could be much more dramatic on the supply side, as thousands of families could find themselves in the position of being forced sellers. The definitions of "rich" used to set the minimum hurdle rates for the small deductible portion of a mortgage that would remain are woefully out-of-whack with reality in cities like New York where most people spending $1 million on a home are far from wealthy. The larger impact on the economy--from a decline in real estate tax revenue to population decline--could be devastating under that scenario.
Let's say someone earning $180,000 a year ($15,000 a month pre-tax, maybe $9,000 a month after) purchased a house at some point in the last few years for $1,250,000, putting down $250,000 and taking a $1 million mortgage. Let's also say she'd gotten a 6%, 30-year mortgage, making her monthly payment roughly $6,000. For the sake of simplicity, let's say taxes and maintenance, etc., add up to another $1,000.) Under current rules, her after-tax housing expense would be more like $5,000 than $7,000; the proportions get even more extreme if she has some rental income--maybe $3,500 versus $5,500. The difference in what's left over to pay for groceries, utilities, tuitions, etc. is $5,500 versus $3,500--huge when you're talking about a family of 4 or 5.
Now, we don't think there's any defensible intellectual reason that home ownership should enjoy the privileged status it does in our tax code, but to change the rules of the game at this point when millions of people have made the largest financial decision of their lives based on one set of ground rules would be a bait-and-switch of monster proportions. Some experts say the chances of these changes getting through are low, but, in the meantime, we're going to have to go back to living in denial. The alternative is too much of a downer.
Goodbye, My Sweet Deduction [NY Times]
Comments
I'll just jump right in and be the heartless SOB here. (Full disclosure: I would take a hit too under the proposed system, in terms of the resale value of my house, loss of local tax deductions and the smaller 15% credit, but my mortgage is small enough to fall within the proposed cap.)
I agree that changing the rules of the game is bound to hit people unfairly, as any major tax shakeup is inevitably going to. But let's face it: in the grand scheme of unfairnesses, making it tougher for upper-middle-class people to own brownstones, in a city where most families rent, is not the greatest outrage imaginable. (People often make the point that having a million-dollar house and a 6-figure income in NYC does not make you rich. That's true, but it doesn't make you poor either, and it would be a justifiably hard sell to the rest of the country.) Owning a house, as we've seen, means the possibility of great gains but it also means taking on great risks, this being one of them.
The other thing to consider is that one reason for the tax change is to do away with the AMT -- which is increasingly hitting exactly the same families you describe. I suspect they'd lose more under the new system than they'd save by being spared the AMT, but I don't know, and I'd love to see somebody work it out on paper.
Posted by: linusvanpelt at November 3, 2005 9:30 AM
These are recommendations from a panel and at least not yet proposals for tax code reform from Bush.
Looks like the mortgage interest is what is going to be the major debate - but even more shocking to me in reading about all the recommendations is that
more tax burden on wage earners (from fewer deductions) and less on capital gains and dividends.
In other words more to the owners and less to workers (even if many of the workers relatively high paid).
Scandalous and outrageous.
(PS - And I don't have a mortgage).
Posted by: Anonymous at November 3, 2005 9:33 AM
But it wouldn't affect you - those who already own homes would get to keep their deductions. It would only affect future purchasers.
Maybe it would be more sane for prices to drop anyway - does it seem to you that paying 5-7K for housing expenses is right on that salary? Someone making that much should not be able to afford a 1.2 million dollar home. I think we here in NYC have gotten a very skewed perspective over the past few years and have lost ourselves a little bit in this housing craze - we spend so much of our money on housing, do we have any left for anything else? Savings? College $ for kids? Enjoyment? Maybe it's just me, but I think there's more to life than living it house poor.
Posted by: Anonymous at November 3, 2005 9:37 AM
Okay, but be careful how far you extend your relativism--after all, people living in homeless shelters have it so much better than those folks in Darfur.
Posted by: Brownstoner at November 3, 2005 9:39 AM
Are you sure existing home owners would be grandfathered? That would certainly lighten the blow...
Posted by: Brownstoner at November 3, 2005 9:40 AM
It's too bad the homeless and the folks in Darfur don't have so much Internet access, because I'm sure they'd find the analogy very amusing.
Posted by: linusvanpelt at November 3, 2005 9:44 AM
It will be phased out over 5 years according to the recommendations. Remember that's all they are at the moment, recommendations. There will be a credit of 15% of your mortgage interest. however, this will only be for interest paid on mortgage debt up to the cost of regional housing. so in NY's case, probably around $400k. Also top tax rates will be reduced to 33% and tha AMT will be eliminated. So you have to factor in all the changes(including elimination of deduction for state and local taxes). But, this will have a tough time getting passed in its present state and might be years, if ever, that this becomes law.
Posted by: Anonymous at November 3, 2005 9:53 AM
My point is that everyone's problems and worries are relative to their circumstances...Whether you live in a $200,000 house a $1 million house or a $10 million house, if the government makes a policy change that would make you have to move out of your home, that's pretty darn drastic. At what income level does someone become a sympathetic case? $80,000? $40,000? Does it matter how large your family is?
Posted by: Brownstoner at November 3, 2005 9:54 AM
Brownstoner, I am fairly certain that I read somewhere that current owners would be grandfathered - I believe it was for the mortgage interest deduction. I'm not certain it would include other deductions but I am sure that there are articles out there explaining it better than I can - if I find the one I read I will post it.
Posted by: Anonymous at November 3, 2005 10:05 AM
While no one can disagree that there is some level of inequity in some people being able to afford to buy a home and those who cannot (unfortunately, this affects all areas of their lives, not just housing and taxes), there is some defensible intellectual reasons for the current policy. Simply put, it is to encourage and reward home ownership. That is a more than rational social policy. History and current experience teaches that home owners are more invested in both their buildings and neighbors. Home ownership encourages maintenance of the housing stock, and investment in the neighborhood. It also spreads rewards and risks of home ownership, and equity appreciation, to a larger pool of society, rather than to just a few landlords. There you go.
Posted by: Anonymous at November 3, 2005 10:07 AM
That would be great. Maybe we are getting worked up into a self-pitying lather over nothing!
Posted by: Brownstoner at November 3, 2005 10:08 AM
Sadly, I can't find that article about the grandfathering and I am getting busy at work but I promise that if I can surf around later, I will look for it again!
Posted by: Anonymous at November 3, 2005 10:16 AM
First of all, a tax code that encourages a family with a HHI of 180k to buy a 1.25mm home is nuts. And banks need to change lending guidelines.
Also, a 15% tax CREDIT on a million dollar loan is plen-ty! Good lord. Also the elimination of the AMT? I think this family would be fine, or as fine as could be expected for people who buy way more house than they can comfortably afford.
I know, I know, good debt vs bad debt and mortages are used to "leverage" money and blah blah. But you play that game and you're playing with fire.
Posted by: Anonymous at November 3, 2005 10:26 AM
"Does it matter how large your family is?" It's funny you should mention that, because the dependent-care credit is maybe even more intellectually indefensible. It's always amazed me that the government increasingly begrudges poor people aid for families, education, etc., and yet pays middle-class people (like me) to have babies. But I'm getting off topic.
Anyway, I guess my bigger point is that the proposal may be far from perfectly fair, but if you assume there needs to be change in the tax code (a big if), it at least seems fair to me that people of your and my income and asset level should pay more than those with less. (Such as lower-income homeowners who don't even itemize.) People who have really stretched to buy could be in a fearful situation, but that is one of the arguments against really stretching to buy.
Posted by: linusvanpelt at November 3, 2005 10:28 AM
anon 10:07 -- I'm hardly the expert on this, but experts quoted in the Times article disagree with your argument. They say that the deduction has not markedly increased homeownership; it's simply enabled and encouraged people with higher incomes to buy bigger and more expensive houses.
Posted by: linusvanpelt at November 3, 2005 10:30 AM
I've seen the reference to the grandfathering of existing home owners also.
As for the elimination of AMT, that would be great, but there is also a proposal to eliminate federal tax deduction for State and Local income taxes paid. If you are hit by the AMT, you are not able to deduct state and local taxes from your federal taxes. To get rid of AMT and get rid of the State and Local tax deduction would be a double whammy for those affected by the AMT. Again this would disproportionately affect blue states where incomes are high and there are high local and state taxes.
In any event, one article I read made a good point. The current tax code was revised in 1986. The proposals for the 1986 code were initially introduced in the late 1970s, so it took almost ten years to come to an agreement.
Whatever comes of this, it will likely be a long time in coming and will, hopefully, grandfather existing owners.
I do, however, agree with the poster that said the home mortgage interest deduction is a good thing since in encourages investment in your primary residence, thus ensuring people have a vested interest in their communities. I though Bush was for an "ownership" society...hmmm. Plus, there is the potential effect on resale of houses and the shrinkage of those who would be able to afford properties without the mortgage interest deduction. I suppose if you look at the other proposals to cut the marginal tax rates further and reduce capital gains taxes, the policy makers want people to invest in other markets...
Posted by: Anonymous at November 3, 2005 10:31 AM
Anon 10:26 (why don't you guys at least just make up a screen name and stick with it--so much easier!),
You are forgetting the significant role that rental income plays in one's ability and decision to make a purchase like that. $1500 a month in rental income pays for $250,000 of the mortgage...Not saying many of us haven't pushed the limits in our effort to escape a cramped urban existence, but if you have rental income and locked in a long-term mortgage because you planned to live there for a long time, it's not as crazy as you suggest.
Posted by: Brownstoner at November 3, 2005 10:37 AM
There is no grandfathering, but rather a phase out of the deduction and its replacement by credit over a 5 year period. I am reading from the recommendations. http://www.taxreformpanel.gov/
Posted by: Anonymous at November 3, 2005 10:40 AM
assuming you always have a decent tenant (don't ask about mine, 26 months of no rent and counting)...
Posted by: Anonymous at November 3, 2005 10:40 AM
although the report only offers recommendations, it *should* impact market prices. an informed buyer will know that tax code reform on the horizon will negatively impact the market, and hence, will factor the pending changes into any purchasing decision. how much a person should discount a purchase because of the proposed tax code changes is open to debate, as no one really knows how things will play out, but given an initial report of this severity, one would think that the ultimate tax code reform will end up being a tough pill to swallow. further, the whole uncertainty of this proposal can't help the market. of course, this all assumes that people are rational and make informed decisions, which is more or less out the window when it comes to real estate these days.
Posted by: j. matthew hijuelos at November 3, 2005 10:41 AM
I've never gotten the "$1500 a month in rental income pays for $250,000 of the mortgage..." thing. All it does is increase your income by 18k a year. You assume that that space has no cost to you except the mortgage, but that is never true in my experience.
Posted by: Anonymous at November 3, 2005 10:46 AM
wouldn't this family be hit with the AMT this year and not be able to deduct all that interest anyway? isn't that what all my friends are complaining about?
Posted by: Anonymous at November 3, 2005 10:55 AM
Yes, probably would be 'hit' by AMT. Which is not necessarily bad thing - at least put a limit on amount of deductions someone could take advantage of. Now with all that complaining about AMT - take a look at panels recommendations. Take away your deductions and voila - won't be affected by AMT any more (so then we can eliminate anyway and tell you that helps make tax code simpler).
Careful what you wish for.
All in all - last 'reform' screwed the poor and middle class at benefit to the rich and this one would screw the affluent-middle and upper-middle (who didn't resist the last round very much) for benefit of the rich (meaning those that get their wealth from dividends/capital gains et al.)
Posted by: pete at November 3, 2005 11:12 AM
To Anon 10:46, I think the reason rental income is calculated like that is because you can also deduct non-cash expenses like depreciation on rental property, meaning that your income isn't increasing by that at all (in fact, the artifical loss on rental property will actually decrease your income, saving you even more taxes). Maybe the government needs to look into the tax deductibility (or actually deferral, I know) of depreciation. Oh, but wait, that would affect big business too -- my bad.
Posted by: babs at November 3, 2005 11:19 AM
The very rich tend to own their houses outright anyway, either by choice or because the co-op board requires very high percentages down.
Posted by: Brownstoner at November 3, 2005 11:19 AM
Totally true Brownstoner -- not only do the most exclusive co-ops in NY allow 0% financing (meaning all-cash purchases), but they also require the buyers to have up to 100% of the purchase price in liquid assets after the sale.
Posted by: babs at November 3, 2005 11:28 AM
Sounds smart to me.
Posted by: Anonymous at November 3, 2005 11:35 AM
1. I think that the comments about grand-fathering or a slow factoring out of the deductability are correct. And remember, with a slow factoring out, you would be getting rid of the deduction as the deduction is going away as the loan repayment shifts from interest mostly to principal mostly. Of course, that depends on the time-frame for factoring out.
2. I think mortgage interest for a rental property or the portion of a primary residence that is rented would most likely stay. That's like any other cost associated with running a rental.
3. There are many other good arguments against making mortgage interest deductable. From a monetary inflation point of view, all that this deduction does (in supply limited markets, like here) is push up the cost of all housing. This in turn increases buyers' leverage, which increases systematic risk in case of a recession.
4. In markets where you can build as much as you want, this creates a distorted market. Perhaps people would want smaller homes and larger TV's if the TV was tax-deductible instead of the home. The big concern with this is that a house (or a larger house) is a non-productive investment. Productive investment is generally assumed to be better for the overall economy.
Posted by: JoshK at November 3, 2005 11:50 AM
i think a major problem with this proposal is that many of us bought our houses and made financial choices with it in mind. ie i can afford a 4000 dollar mortgage because i will save 800 dollars a month and the savings makes buying a house a worthwhile investment. to change it in midstream can now make your investment a poor choice. i already now i would not have bought the house i'm in without the deduction, if i already know this we can assume there are plenty other people like me. therefore we can also assume it would take me out of the market place and others too decreasing the price of homes. add to this a possible housing bubble or at least slight decrease in the horizon i see a disaster in the making. on top of this in ny you would not be able to deduct state/city taxes, more taxes paid. and on top of this the highest bracket will get a 2% tax decrease while singles at 100k get an increase. as a single isn't bad enough i subsidize everybodys children already. sorry but the rant but the implications of this are huge and if this goes through it will profoundly affect my life and many others. i am thinking about selling already for i rather put my money elsewhere and go back to renting and i fear i could get stuck where i live now.
Posted by: Anonymous at November 3, 2005 11:56 AM
1. It would kill me.
2. I'm all for it.
Posted by: Anonymous at November 3, 2005 11:59 AM
If this was really about helping the middle class now being hit by the alternative minimum tax, why don't they just adjust the AMT for inflation?
Posted by: jk at November 3, 2005 12:00 PM
One upside if you are a long term owner and this makes your resale do down - it would lower your property taxes.
Posted by: JoshK at November 3, 2005 12:03 PM
Frankly I think the loss of state/local tax deductions is more unfair. Some snide Republican said something along the lines that red states with low local taxes shouldn't subsidize trash pick up for Californians. That would be true if red states paid an equitable portion of federal taxes but by far they take more than they contribute. When they can pay for their own stops signs and traffic lights then they can complain.
Posted by: Anonymous at November 3, 2005 12:04 PM
I am sure this will sound much better in a few years, when everyone is hit with the AMT tax. So the AMT will remove the mortgage, state and local deductions anyway. The reason why they don't adjust the AMT for inflation, is because it would not be "revenue neutral".
Posted by: djr at November 3, 2005 12:08 PM
This is designed to screw the blue states, IMHO. If the AMT is the problem, just index it to inflation. Abolishing it so that you can abolish the deduction for state and local taxes (basically owing only in blue states) and the deduction for mortgage amounts inbetween something like $200-300,000 and $1 million (c'mon, people, what's a typical mortgage for a house in NY or California compared to Kansas?) also hits only the blue states.
Yes, your President wants you homeless, just like he wants the democratic (& black) voters in Louisiana to be homeless. He's pandering to his 35% base -- white Christians who live in red states and think Darwin shouldn't be taught in the public schools. He doesn't care if you're homeless. He really doesn't.
Posted by: Diana at November 3, 2005 12:15 PM
Anon at 11:56, if there had been no deduction when you bought, housing would likely have been cheaper and you wouldn't have bought something you could barely afford. That is what I think the "pro" argument is in terms of getting rid of the deduction (at least in the future and for the long run) - it will balance things out and make housing more of a balanced cost for people, instead of something that is 50-60% of their monthly costs.
Posted by: Anonymous at November 3, 2005 12:25 PM
1. People, seriously, if your main argument is to compare having to sell your brownstone and live in a co-op, or a rental, or a smaller house, or a cheaper community, to *being homeless* -- you've pretty much lost already.
2. As much as this thread is directed at what "Bush" wants to do to us, we should keep in mind this was a bipartisan panel. (One that Bush did charge, granted, to make "pro-growth" recommendations, but also one he directed to promote home ownership.) The Bush administration will take the recommendations and then do what it wants with them. For all I know, its proposals will be even worse for blue-staters, but we don't actually know what "Bush" wants to do to Brownstoner's family yet.
Posted by: linusvanpelt at November 3, 2005 12:28 PM
Do I think people should be able to deduct 100% of the interest of their million dollar mortgages? No.
Tax laws change, they always have. Interest on mortgages were not always deductible. If you thought they were a guaranteed thing when you bought your home, you didn't have great advice. Do I think they'll change the rules now or in this administration? No. Do I think they will change before your 30 yr mortgage is paid off? Of course! They always change.
Aren't you hit by the AMT this year making this all moot?
Posted by: Anonymous at November 3, 2005 1:18 PM
Overall this is supposed to be revenue neuteral. Of course that is for the country as a whole, not for each person. But, maybe many of the same people who got hit w/AMT were the same people who got big mort deductions.
Posted by: JoshK at November 3, 2005 1:27 PM
if you are taking out a 30 year mortgage you are screwing your I-don't-care-how-many children. Buy something you can afford.
Posted by: anon at November 3, 2005 1:36 PM
couple points:
1. there's no outright grandfathering in the panel's recommendation. doesn't mean that wouldn't end up in any final legislation, but i would severely doubt any outright grandfathering.
2. the reason the panel didn't "just" propose indexing it to inflation is because the panel was told to be revenue neutral. since indexing it to inflation now would cost revenue in the future, they have to offset that lost revenue somewhere. hence, this interest deduction change.
3. i agree with the sentiment that this isn't likely to occur anytime soon, probably not before AMT really starts to affect more people (who would then feel the benefits of these changes). But as that happens and the need to change things is clear, this panel is the only official proposal on what to do and it will be an available solution and maybe a starting point for the debate. basically, its the opening salvo.
Finally I do think that its good for our government to consider painful solutions to real problems. i'm a new home owner in brooklyn and this would hurt, but i'm glad bush et al are at least looking at a real problem and coming back with fairly non political solutions (OK maybe blue state leaning, but still takes guts to propose it)
Posted by: bob_p at November 3, 2005 1:36 PM
So we all know that these ideas would hurt us significantly. I quickly looked at myself and looks like would cost me extra couple thousand and I don't have any mortgage interest. Perhaps even more $ with change in tax brackets that I saw in article yesterday but can't find today.
So if 'revenue neutral' then who is benefitting?
Well, all those generous cuts for wealthy would be permanent and made even more generous.
Don't get too narrowly focused on just the mortgage interest deduction - you could lose that debate with many people on that.
Look overall and see who benefits by this 'revenue neutral' idea - and you will see more skewing to investor class and
more screwing to wage-earners. Keep the debate focused on that issue.
Posted by: Anonymous at November 3, 2005 1:52 PM
I like that part where the owner in this scenario figures on 1K a month in taxes and maintenance, etc.
I guess the furnace never gives out and the heating bill never comes and pipes never break.
But seriously, who would do this? We're told to save $600 a month per kid for college but only after fully funding our retirement (tax benefits for IRAs, etc. in proposed system are greatly expanded, thank god). In this scenario, this family spends their $3500 right there.
Posted by: Anonymous at November 3, 2005 1:53 PM
Frankly, I when the tax system is simplified, the working class wins. The proposed tax form would be the size of an index card -- front and back. Many of the loopholes would be closed, deductions across the board would removed, and it would be made more fair to people who can't afford $10k ((or $400) for professionals to prepare their taxes.
And it's true, I think deductions for $1mm mortgages are wrong.
Posted by: Anonymous at November 3, 2005 1:59 PM
Tax laws change. Why should someone that buys a house get a mortgage interest deduction at the same time as the renter has to pay his rent from after-tax income? They both need a place to live in order to produce the income from which tax revenues are obtained. Really today's system is one where renters subsidize homeowners. Seems logical that this should somehow be equalized. If it's by killing the mortgage interest deduction, so be it.
Posted by: Anon at November 3, 2005 2:09 PM
Is home mortgage interest subject to the AMT?
Posted by: Anonymous at November 3, 2005 2:11 PM
"renters subsidize homeowners" - of course they do - someone owns the apartment they are renting. What a silly comment - and the proposal would not affect that dynamic at all - there is no benefit to renters in any way.
Currently, everyone who owns a home can the mortgage interest deduction. If you have a larger mortgage, it is because it is a more valuable house and you make more money. You also pay more in income taxes and property taxes than someone with a smaller income and less expensive house. It is all relative.
What concerns most people is changing the rules of the game for existing homeowners who based decisions, in part, on the tax benefits of owning your home. Yes, if you could by your home with all cash, this would not be a consideration, but in the real world, people do look at the net effect of the tax advantages when purchasing - whether it's a $1 million or $150,000 house.
Posted by: Anonymous at November 3, 2005 2:32 PM
For my personal situation, I have decided not to buy until the buy/rent ratio makes more sense. Until then, I have invested what would be my downpayment in some various stocks / bonds / etc and use the income to pay my rent.
I would say that it's not consistent policy that the interest from buying a home should be a deduction while the investment income is taxed. Especially when the investment income has already been taxed once or twice before.
I haven't read the proposals from this comitte, but it seems like they will balance this out more fairly.
Posted by: JoshK at November 3, 2005 2:40 PM
"Is home mortgage interest subject to the AMT?"
No, but state and local income taxes are.
Posted by: Anonymous at November 3, 2005 2:41 PM
What do you mean "no"? If you get hit with the AMT, your deductions are useless after a point.
Posted by: Anonymous at November 3, 2005 3:08 PM
And just why do these changes need to be "revenue neutral"? Our government is currently running up huge deficits and cutting taxes for whom?
Posted by: jk at November 3, 2005 3:17 PM
here's a thought. on the one hand, the proposals cut back homeowning incentives and would cut home prices. on the other, they greatly advantage income earned from capital gains and dividends. say you own a house in NYC and have built up several hundred thou -- or more -- in equity. assuming the drop in house prices still leaves you with equity, isn't the tax panel basically encouraging you to sell your house, rent and buy lots of stock?
Posted by: linusvanpelt at November 3, 2005 3:54 PM
'Revenue Neutral' is what the 'reform' claim/objective/mission was to be.... They were not supposed to come up with way to get more or less revenue for federal govt. Just raise same $ amount in different way.
So if I were to pay significantly more - who - or what (as in corporations) is gonna pay less under these recommendations?
Posted by: Anonymous at November 3, 2005 3:57 PM
Absolutely it sounds to me that stock ownership would be the big winners.
Posted by: Anonymous at November 3, 2005 3:58 PM
not all stocks issue dividends.
Posted by: Anonymous at November 3, 2005 3:59 PM
Investment in non-real estate assets is not some implied goal - it is explicit in many of the statements issued with the proposal, along with proposed cuts in capital gains taxes on all investment profits.
Posted by: Anonymous at November 3, 2005 4:07 PM
" isn't the tax panel basically encouraging you to sell your house, rent and buy lots of stock?"
IMHO, the idea is just to be neuteral between stock and real estate investments.
Right now there is a bias towards real-estate because of this deduction. (But you might argue that re taxes counter this to a degree).
Posted by: JoshK at November 3, 2005 4:22 PM
I wish! From an intellectual viewpoint, I like the idea of simplifying the tax code. Just because housing in NYC is expensive doesn't mean taxpayers in general should be subsidizing people with million dollar mortgages. The tax code does not treat someone with a 1m mortgage in flyover country any differently from someone in NYC/CA. Extremely unfair. From my personal perspective, while the mtge interest deduction is a nice little bonus, I have NEVER, ever factored it into the costs of owning a home. If we were a family of four living on a 180k income, I would be comfortable spending no more than 25% of our net income on housing. And if that doesn't buy us anything, so be it. We'd rent. The only situation where I might be comfortable taking on risk is if the rent/own ratio were more even and I saw some upside.
IMHO, people are going to get burned big time when the mortgage interest deduction gets whittled down. And I can't but feel smug.
Posted by: puppypure at November 3, 2005 4:35 PM
The Times article on this is pretty good. It's also the 'most emailed' when I last looked.
So they've recommended moving the cap down from $1mm mortgages to $400K something (in NY for example). My bet: They'll settled in the $650k range and give up on that idea of losing the city/state tax deductibility. And you'll be able to deduct half the re taxes.
Posted by: Anonymous at November 3, 2005 4:50 PM
that's fine, I'll just increase the rent for the tenants. Mooo Haaaa Haaaaa Haaaaaa!
Posted by: Anonymous at November 3, 2005 5:01 PM
and people wonder why they are not liked...
Posted by: Anonymous at November 3, 2005 5:06 PM
Just a little sarcasm, silly...
Posted by: Anonymous at November 3, 2005 5:08 PM
No, the idea of investing in stocks is not to live off the dividends (apart from what used to be called "widows'and orphans'" stocks because of their reliable dividend streams), but to make money on increases in the stock price -- protected (like real estate) by capital gains rules that reduce the tax rate after a certain time.
Posted by: babs at November 3, 2005 5:41 PM
"No, the idea of investing in stocks is not to live off the dividends"
I didn't realize that. I'd better sell.
Posted by: JoshK at November 3, 2005 6:00 PM
As I understand interest deduction from a mortgage is exempt from the AMT. In regard to home ownership related deductions, the AMT only stops one from deducting property taxes.
Posted by: Anonymous at November 3, 2005 6:38 PM
I bought my first apartment in these heady times and even so, I'm favor of a downturn in this market. I grew up in NYC and thus have lived here for almost 30 years. It burns me that people are buying real estate for speculation purposes only -- that's what's going to kill Brooklyn in the end if there isn't some kind of change. We make all this talk about how it's Bush or Bloomberg or whoever who is screwing us over, but it's not taxes and it's not Ratner who is raising the rent or making neighborhoods impossible to afford. LOOK AT YOUR NEIGHBOR who is putting in some new windows and getting a paint job and then trying to sell you the old apartment for an extra $50k. We're destroying each other by playing the stock market in our homes -- put your money in stock and gamble that way. If we complain about how much real estate costs and how we can't afford our mortgages, we only have ourselves (and let me put a dig in here, Corcoran) to blame.
Posted by: Lind at November 3, 2005 7:42 PM
we're destroying each other?
Posted by: Anonymous at November 3, 2005 8:50 PM
I don't think it's fair to blame owners. IMHO, this is a very simple case of increased demand and a very limited supply.
Now, you could elect Freddy Ferrer, chase most buisiness out of the City, maybe increase spend, and go bankrupt. You'd certainly decrease the desireablity of NYC and then lower prices.
On the supply side, you have many constraints that are much more easily moveable. We can allow more building. The cost of new construction is way below the cost of purchase. In other markets, this is how a lower price equilibrium point is reached. Or/Also, we can reduce the RS/RC laws - not to rehash past posts, but these do reduce the supply on the market.
I don't think there are really many other options. People like living here and are willing to pay up to do so. Speculation (at least in the textbooks) is supposed to eventually play into more supply, lowering prices.
Posted by: JoshK at November 3, 2005 9:23 PM
As some earlier posters said, all of this is just speculation: the grandfathering, the 5 - 10 year roll-out, any changes at all, in fact, are all up in the air at the moment.
It is my opinion that this is never going to happen. Bush does not want it to happen. Congress does not want it to happen. Powerful lobbying groups do not want it to happen. The public does not want it to happen. It would have a domino effect that would reach far and wide and affect banks, lenders, insurers, home builders & home owners directly as well as many other industries indirectly.
Bush wants to simplify taxes but he never expected to hear his panel recommend doing away with current mortgage interest and prop tax deductions, which, the panel has found, is tied so tightly around simplifying tax code that the two cannot be separated. This is going to be dropped, like Social Security reform, and he will move onto the lowest hanging fruit of this tax-trifecta---permanently abolishing the estate tax.
Posted by: Anonymous at November 4, 2005 1:16 AM
To soften the blow, the panel proposed to phase the change in over five years. But as home buyers across the country were forced to cut back on the value of homes they could afford to buy, they would inevitably drag home prices down.
Posted by: Anonymous at November 4, 2005 2:06 AM
"What do you mean "no"? If you get hit with the AMT, your deductions are useless after a point."
I mean "no." As I understand it, what AMT does is to disallow certain deductions, among them property taxes and state and local income taxes, then recompute what your tax would be without them.
Mortgage interest is NOT one of the deductions that AMT disallows.
I am not a tax pro, so if I am wrong, please correct me.
Posted by: Anonymous at November 4, 2005 7:30 AM
Long-term, taxes are going up -- the current deficit (not just cash deficit, but the balance sheet deficit associated with social security, etc) is rising too quickly.
At least by reducing the tax on high-end homes, we can rebalance allocation of resources. Way too much money in this country over the past 10 years has been invested in real estate, which unlike corporate investments (stocks, bonds) and municipal investment (education, infrastructure) does not serve to increase GDP or create jobs. It's ludicrous that in some boom cities 30% of new jobs in recent years were in construction -- and it's not sustainable.
Better to remove the tax shield on real estate while still helping out people below the median with at least getting a roof over their head. Yes, homeowners will still take a hit on valuation if they bought recently -- but in the long term we won't all have a ridiculous amount of our savings and net worth tied up in what is essentially a non-productive asset.
Posted by: Tom at November 4, 2005 8:48 AM
The fact is that the mortgage interest deduction is inherently unfair and regressive aspect of the tax code. Since poorer folks rent, the wealthier inherenly benefit. Now there is not the political cahones in Washington for this ever to pass, so there is little to worry about. This is the Times trying to get the Liberal Latte Sippers pissed off at Bush. Its called playing to the choir. Its interesting how global war, the degradation of basic legal rights and rampant corruption barely raises an eyebrow these days, but threaten the vaulted value of one's beloved brownstone. Well now there is hell to pay.
Use your brains for five seconds here, who votes Republican, it sure is not the poor. This proposal is dead on arrival. The goal of the Republicans is to remove the last vestiges of New Deal America by eliminating progressive tax rates. In exchange they want to remove deductions in order to make tax collection more efficient. The ideal situation for the Republicans is a flatter tax with deductions. The mortgage interest rate deduction will be saved probably with some dash of dramatic rhetoric from our esteemed legislators about how home ownership embodies the American Dream, ad nauseum.
The real problem with the current tax structure is that besides being regressive, it distorts the market place by encouraging an overinvestment in the housing sector, in particular the luxury housing sector. Not only is the New York City economy unhealthily dependent upon the "wealth creation" of housing appreciation, but the entire country's economy is now based upon building and furnishing homes. Much like tech stocks before, this investment bubble will not serve the country well in the long term, as money that could be going into investments in that are actually wealth producing as opposed to condos with his and her walk-in closets. The government should not be encouraging one investment over another unless there is a compelling reason to do so. I would also like to add that the "studies" that show the benefits of home ownership are basically weakly veiled arguments to justify a tax break. You support the tax break because it works to your advantage, not because encouraging home ownership makes you a more loving spouse or better patriot. If you controlled for income (NYC and Cali nothwithstanding) what those studies will show is that people with a basic modicum of income and steady employment do better than poor people who cannot hold down a job.
Sure the cap is sticking it to the Northeast and California. Here's a tip start voting Republican and this problem will go away. Republicans are smart, they will use this as a bargaining chip to get something out of the democrats, probably more cuts to welfare or public transit, which the democrats will gladly give up to protect wealthier homeowners in their districts. But at the end of the day, Republicans have no interest in this passing as they will protect the owners of million dollar homes in Texas till the day they die.
Posted by: Ferrerin04 at November 4, 2005 9:02 AM
Are you kidding me? Someone making $180k a year with a 1.25 million dollar home is not wealthy? The median household income in this country is something like 50k. Even in Fairfax County, VA which I think is still the wealthiest county, median income is only 90k.
Boo hoo hoo. I'm sure there's a single mom trying to raise two kids on a teacher's salary ready with a shoulder for you to cry on that you can't afford your precious brownstone. Guess you'll have to go find a new neighborhood to gentrify.
Posted by: Anonymous at November 4, 2005 9:57 AM
Yes, indeed< Josh, you'd better sell -- if you've been trying to live off stock dividends, you'd have done much better investing that money in many other areas. Surely you're kidding with that comment. What stocks do you own (and how many shares of them) that pay you enough money to live off the dividends? And not only that, but what's happened to their share prices?
Posted by: babs at November 4, 2005 10:27 AM
Only 37% of this nations people have any faith in this president. This tax talk is just another distraction.
Posted by: Anonymous at November 4, 2005 10:54 AM
[I mean "no." As I understand it, what AMT does is to disallow certain deductions, among them property taxes and state and local income taxes, then recompute what your tax would be without them.
Mortgage interest is NOT one of the deductions that AMT disallows.
I am not a tax pro, so if I am wrong, please correct me.]
What that person is saying is very simple, even if the calculation and application of AMT is not. Basically, even if mortgage interest is not one of the deductions that AMT disallows, if you are in a high tax state and on a certain income (in the low six figures) then the rate that AMT calculation comes up with, that has to be applied to your income after the allowed deductions, is high enough to render any allowed deductions to be useless means. This is because AMT forces you to pay a certain mimimum amount of taxes that is invariably higher than the amount that you get by applying that mortage interest deduction. Hence it is of no benefit.
Posted by: VDH at November 4, 2005 2:11 PM
"Yes, indeed< Josh, you'd better sell -- if you've been trying to live off stock dividends, you'd have done much better investing that money in many other areas."
I thought this thread died.
I have about 30 names, regular stocks, MREITS, REITS, ConRoys, pfrds. My portfolio's cap gains are up about 9% a year. But the divs run about 4.5% after tax and have paid for most of our rent.
If we would have taken this $ and bought an apt w/it similar to what we rent we would be spending a lot more every month and our cap gains would be entirely based on our apt's appreciation or depreciation.
Posted by: Anonymous at November 5, 2005 11:46 PM
That last post was me. I was using a different PC that didn't have my ID saved.
Posted by: JoshK at November 5, 2005 11:48 PM
As for "it's the stock price not the dividends," check out The Future for Investors by Jeremy Seigel. He takes apart that fallacy (which he calls the growth trap).
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