Drop-off in mortgage interest deduction

Are you worried about the mortgage interest deduction going away? After all, it’s a high-profile, high-cost target for federal budget-cutters — and was prominently featured in the report of the presidential deficit-reduction commission late last year. Reformers have been trying to kill or at least clamp a ceiling on these write-offs for decades.

But here’s an intriguing twist that has just emerged on Capitol Hill and that might bring some encouragement to homeowners, agents and builders who strongly oppose any cutbacks in tax benefits. According to new estimates compiled by the nonpartisan Joint Committee on Taxation — Congress’ top technical resource on all tax law matters — the mortgage interest deduction is not quite as big a hole in the federal budget as previously estimated.

In fact, it’s significantly less than the committee itself estimated early in 2010, with $88 billion lower in revenue losses now projected over the next three fiscal years. That’s big money, even in an era of trillion dollar-deficits. Why the sudden reappraisal of the revenue losses caused by millions of homeowners writing off their mortgage interest?

Start with this: There’s less mortgage interest being written off than earlier statistical models had anticipated. Home values are down in many parts of the country, and lower purchase prices and far stricter underwriting mean smaller mortgage amounts. Interest rates have hit half-century record lows, and have remained at or near those floors for much longer than anyone had estimated.

Thirty-year mortgages at 4 1/2 percent obviously require much less in monthly interest payments than do similar loans at 5 1/2 percent and 6 percent. Millions of homeowners who’d been paying even higher rates than that have refinanced in the past year — the combined effect of which has been to reduce the estimated amounts of interest being written off now and for the next couple of years at least. For example, the tax committee last January predicted that mortgage interest deduction losses to tax revenues for fiscal 2011 would total close to $120 billion. Now the estimate is $93.8 billion.

These are brain-bending big numbers, but the fact is, it appears that the revenue-loss costs of this jumbo-sized tax benefit for homeowners will be less than anyone expected. In the politically sensitive world of federal budget deficit reform, every lower loss is a better loss — and one that presumably needs less reform.

The committee’s new projections have also turned up some other intriguing and previously unreported facts about key tax benefits for buyers and owners. For example, though the popular first-time homebuyer tax credit programs of 2008 and 2009 that stimulated millions of purchases were net revenue drains for the government during fiscal 2010, they are now morphing into revenue-raisers — to the tune of $6.5 billion from 2011 through 2013.

How’s that, you might ask? There are two factors at work: The first credit, enacted as part of the 2008 emergency economic stimulus legislation, was for a maximum $7,500 or 10 percent of the house price. But it was more of an interest-free loan than a typical credit. Under the terms of the program, buyers are required to make annual repayment installments of 6 2/3 percent of the credit they claimed over the next 15 years — and they’re beginning to do so.

But it’s not just those 2008 buyers who’ll be paying higher taxes. The two subsequent homebuyer credit programs enacted by Congress — $8,000 for first-time purchasers and $6,500 for repeat buyers — did not require repayments. But both programs came with strict rules that experts believe will add to revenues collected by the IRS during the years 2011 through 2013.

For instance, Congress required that credits claimed under the $8,000 and $6,500 legislation be repaid if the owners do not continually use their house as a principal residence for 36 months after the purchase. Say you took the $8,000 credit on your 2009 federal tax filing, but then decided to sell the house or turn it into a rental investment in 2011. Guess what? Ka-ching! You owe the government $8,000 the day you make that move — and the IRS says it has increasingly sophisticated audit programs to detect such transactions and to sniff out frauds and other rule violations requiring paybacks and even penalties.

Bottom line, by the committee’s estimates, homeowner tax benefits will still represent large contributors to the federal deficit. But for a variety of reasons, those costs should be smaller — and, in theory, slightly less vulnerable to attack — for the years immediately ahead.

Ken Harney is a syndicated real estate columnist.