Joe Wilson's Silicon Valley Real Estate Blog

The juiciest carrot that dangles from the stick of homeownership has long been the promise of a generous mortgage interest tax deduction (MID). However, with legislators currently scouring the nation’s fiscal landscape for ways to cut the national deficit, the tantalizing tax benefit of homeownership is under attack once again.

Rather than doing away with the tax benefit altogether, which would essentially be political suicide for any legislator involved, the National Commission on Fiscal Responsibility and Reform is considering a more conservative version of the tax deduction. Under the revised plan, MIDs would only be eliminated on second homes, mortgages of more than $500,000 and home-equity loans.

Opponents of reforming the sacrosanct tax deduction are many. With the housing market still floundering in the doldrums of the sluggish economic recovery, concerns of stunting what little growth the housing market is experiencing abound. If the keystone incentive for homeownership is abolished or scaled back, many fuss that new homebuyer demand will diminish and home prices could fall precipitously as much of the value of a home comes from the tax benefits it provides as price support.

While the political implications of a MID reform are vexed, some restructuring of the benefit makes economic sense. Although the deduction effectively promotes homeownership, it does so to an extreme. Homebuyers are encouraged to take on more mortgage debt and buy more of a home than they need, since they may offset the overall cost of their home with the money they believe they are saving with the tax deduction.

In the final sum, however, the tax deduction may not actually save the homeowner any money — economists argue it simply contributes to higher property prices that effectively render the tax deduction moot.

Also, economists maintain the tax deduction is regressive in nature and stands as a viable candidate for repeal in order to mitigate the national deficit. Politicians, especially those of the supply-side variety, consider the MID an indispensible tool for promoting home ownership and driving the real estate construction market.