So, in doing my taxes this year via Turbo Tax, you enter into it all your info, and it spits out what you owe or what you get back. Lots of people use it. While you enter in your stuff, it gives you an on-going running total of that cash value. It so happened that this year I put in my home loan in last, and doing so saw that the primary reason I got money back this year was because of the tax deductions you get when you have a loan on your house.
I don’t really care about the rational that was given to the government about needing this tax cut, but I was curious at who really benefits from it. On the front of it, I benefit obviously, right? But in looking at more details, what is really deductible is the mortgage interest of the house. In a 30 year fixed, I pay less interest so that deduction decreases the longer I have the house. In the last 10 years, I’ll primarily pay a small amount on the house loan in interest, so my tax rebate will be quite small. That is, unless I sell the house and buy a new one. Or re-finance it.
That point got to me. The real benefit of the tax deduction on mortgage loans is to the housing industry. There is a personal tax advantage to owning a new home if you get a loan. I’m not saying that people sell their home to specifically get that tax advantage, but rather this has gamed the system so that people do stuff make it more palatable for changing houses or to take out bigger loans on them. You have strange financial instruments such as interest-only loans that make it basically free for the first 5 years to live in your house given the tax rebate structure. (After that, the loan converts into something ugly, so you pretty much have to re-finance or move, again helping the banking structure). Keep in mind that you can only deduct the interest in the ‘real value’ of the house, so you can take out a million dollar loan on a $100k house and get this deduction. But you can take out money and make the house ‘better’ so as to increase its value.
It does seem as though this tax deduction made it easier for the current credit crisis to occur. You end up with a MLM scam of home buyers, sellers and the middle-men who finance it, and we’ve seen the current crop of investors (new home buyers) in financial hell because the MLM pyramid bottomed out. To be fair, we’ll find some new home builders in hurt too, but they have over-inflated the housing market buy building many new houses. The idea of short-term home ownership does explain why the majority of the new houses are so cheaply constructed.
As odd as this sounds, it feels like it makes no sense for the interest on your loan to be tax deductible. Does it help first-time home buyers? Maybe. In my case of when I bought my first home it didn’t, rather having the interest rate low helped. I was more worried about my monthly bills then my yearly tax rebate. This was a bonus to me, but I’d like to find out where it really came from and who pushed for it. There is no way its going away now, but it feels like it should.
(BTW, back to computer stuff in my next post… comparing git to mercurial)