Tuesday morning links

mortgage interest reduction is the only thing that allows many people to afford a home at all who'd otherwise be stuck in rental apartments where the rent costs them more than the mortgage payments on a mortgage they can't get because banks won't give them a loan.

I was in that situation.
Was paying $1200 a month in rent. Buying a house, because of interest deduction, I was able to get a mortgage that's costing me less than $1000 a month on a house twice as large as that $1200 a month rental.
Without deduction I couldn't have gotten that mortgage because of the rules imposed by the government and central banks on mortgages (percentage of income, etc.).

And now they're trying to remove that deduction, which'd cost me like $400 a month, and effectively put me in a situation where I hold a mortgage I'm not legally allowed to hold given my income.

Only benefits the rich? Think again. Unless you consider anyone who buys a house to be "the rich", which is Bernie Sanders style thinking.

#1 JTW on 2017-11-07 08:06 (Reply)

It would drive down the cost of homes, because home prices factor in mtg deductions

You are right tho, it's not just the rich at all

#1.1 Bird Dog on 2017-11-07 08:09 (Reply)

How would it drive home costs down? As a home owner I count on the interest deduction to off set part of my home costs. How would removing that lower construction or land costs?

#1.1.1 FRP on 2017-11-07 08:51 (Reply)

Why allow interest deduction on student loans? Why allow any interest deduction? The mortgage interest deduction is just another special interest free stuff. The real problem for the middle class is that taxes (and spending) are too high. Change the tax laws so that everyone pays taxes no one gets a free ride. End charitable deduction and end tax exempt entities and their special treatment. That would be genuine tax relief for the middle class.

#1.1.1.1 GoneWithTheWind on 2017-11-07 09:51 (Reply)

why allow any interest deduction on real estate loans by landlords? Why encourage borrowing at all?

#1.1.1.1.1 jaybird on 2017-11-07 17:57 (Reply)

I don't understand "why encourage borrowing". Is it an anti-capitalist kinda thing or a personal feeling about buying things for cash?

But no matter. It is deductible because it is a business expense. That is logical, legal, and it is likely that if a business had to pay taxes on the income before expenses that they could exist.

#1.1.1.1.1.1 GoneWithTheWind on 2017-11-07 19:04 (Reply)

BD, I love your blog, and greatly respect you and friends/cohorts for your effort and opinions. But without the mortgage interest deduction, the government gets more taxes from homeowners than landlords for the exact same housing expenses. That skews it against home ownership, rather than de-skewing it.

If Willy Sutton was a congressman asked under truth serum about why tax homeowners, he would say "because thats where the money is".

#1.1.2 jaybird on 2017-11-07 22:38 (Reply)

The flip side has been my experience that realtors and (especially) developers use the deduction as a pretense to try to upsell properties that you realistically can't afford. Pay the bank or pay the IRS, it's often a wash. But I do sympathize with JTW, who used the deduction to escape that Twilight Zone of dicey loan qualification. Maybe the compromise reduction to the first $500,000 isn't such a bad idea after all.

#1.2 Mike Anderson (Link) on 2017-11-07 08:48 (Reply)

I think you're right... and the fact that Ilya Somin is advocating for its removal (he's out in left field on many things) really makes me think you're right.

Perhaps the deduction should never have been introduced in the first place, but eliminating it will hit the middle class.

#1.3 Ray on 2017-11-07 09:27 (Reply)

If the mortgage deduction is "bad", then the deduction of real estate loan interest by landlords should also be "bad".

The mortgage deduction encourages home ownership, and positive community behavior (maintenance, concern for good rather than crooked government rather than just moving away, etc. It equalizes the playing field for home ownership vs renting.

Removing the mortgage deduction favors landlords by giving them a cost benefit. It tilts the playing field against regular voters/people vs real estete behemoths. The homeowner can't deduct mortgage interest, but the landlord can deduct real estate mortgage interest. Big favor for the landlord industry. Are Trump and hid Goldman Sachs advisors behind favoring big real estate moguls by forcing people to rent, rather than own their own homes? Looks like it.

#1.4 jaybird on 2017-11-07 09:47 (Reply)

I hope you aren't serious and are simply trying to make a point. The mortgage "deduction" for a landlord is an adjustment that is used to determine income. If the landlord incurs costs that decrease his income that is legitimate. He still pays taxes on actual income.

#1.4.1 GoneWithTheWind on 2017-11-07 09:56 (Reply)

I am absolutely serious. I only got a B-plus in Tax in law school, perhaps because I found the tax laws and phony rationalizations to be so crooked and slimy that it was disgusting. Tax law is where lots of crooked bribe money is, because that is where the rubber hits the road.

There is no reason to have a crooked playing field to favor landlords so they can operate more cheaply than home owners. Do you want a nation of only renters?

Jean-Baptiste Colbert was partly right in saying "The art of taxation consists in so plucking the goose as to procure the largest quantity of feathers with the least possible amount of hissing."

For our corrupt congresscritters, the art of taxation consists in so defining taxable income as to procure the largest quantity of bribes and contributions and hidden business "partnerships" for themselves, with the least amount of public objection to their future election.

Do you think that increase in the dollar value on an asset, merely because of inflation, is "income"? When the Federal Reserve government "policy" is to foster inflation?

#1.4.1.1 jaybird on 2017-11-07 18:55 (Reply)

Have you ever been in business? Did you make a profit? Did you pay taxes on your gross income or your net income after expenses. It is really that simple. If you don't understand this point regardless of your view on taxation than you probably got a D- in accounting and economics. This really isn't a very controversial point. ALL businesses are allowed to deduct expenses. How could it possibly make any sense to do otherwise?

#1.4.1.1.1 GoneWithTheWind on 2017-11-07 19:10 (Reply)

GWW, you (intentionally?) miss the reality that "income" is only what congress says is "income". No more, no less. If the tax law says that landlord "income" is taxed without consideration of landlord mortgage interest (to level the playing field for rental vs homeowner housing costs), that is the way "income" will be defined for both. Its all politics of voter hissing (vote-the-bums-out potential) vs lobbyist “donations” to congresscritters.

My accounting grading = A. Have started a number of businesses. How 'bout you?

#1.4.1.1.1.1 jaybird on 2017-11-07 22:07 (Reply)

Bingo. (Windy's stuff is commonly the product of habit, not reason.)

#1.4.1.1.1.1.1 Meh on 2017-11-08 00:53 (Reply)

GWW, based on your accounting training, what are the homeowner costs vs landlord costs for a house of say $500K with a $400K mortgage and $10K real estate taxes, for a homeowner vs. a landlord? Note that when the renter pays the real estate tax and the mortgage interest to the landlord, it is deductable by the landlord but not the renter. The key point is that government EXTRACTS TAXES FROM THE HOMEOWNER WHICH IT DOES NOT EXTRACT FROM THE LANDLORD, FOR THE EXACT SAME COSTS (sorry to yell, but this is critical information).

If the homeowner is in, say a 25% tax bracket, the taxes and mortgage interest are $40K, the government takes $10K from the homeowner, but not the landlord for the exact same housing costs. The renter pays rent to the landlord to cover the tax and landlords mortgage interest, but the homeowner pays tax, and landlord pays no taxes. The homeowner can't afford to make a big donation to congress because of the extra tax....

With your accounting expertise, would you recommend that I own and rent a house to you, and you rent a house to me? Or, that the mortgage bank owns the house in a land trust, with the renter having a right to buy the house after paying rent for 15-30 years? Easy to prepare such arrangements. Shows how transparently anti-homeowner, pro-big real estate landlord donors-to-congress this proposal is. But they will be voted out of office if they try this. Maybe the congresscritters don't care about being unelected if the bribes/campaign donations are big enough?

"Income" is simply a congressional construct about who to tax. Again, please answer my question about whether an "increase" in the dollar value on an asset, merely because of inflation, is "income"? Lets say that you bought a house in 1940 for $17K. In 2017 you sell the same house, now over a century old, for $800K. The Federal Reserve government "policy" has been to foster inflation so that what is called a dollar in 1940 is now "worth" only 2.5 cents. Do you have $780K of "income" to be taxed? How phony is that for arbitrary definitions of "income"?

#1.4.1.1.1.2 jaybird on 2017-11-07 22:22 (Reply)

sorry $17K (actual number) should have been $20K (for simplicity).

#1.4.1.1.1.2.1 jaybird on 2017-11-07 22:27 (Reply)

We're in Canada: we don't get to deduct our mortgage interest from our tax returns. Nor do we get to deduct the taxes we pay to our province of residence from our federal return. It is as it is.

We have lived with this. We bought our first home knowing we could cope with the payments (the city taxes were another issue: when the city offered a bonus for paying early, confronted our bank manager and asked if they would pay early to get this premium; they would not, I demanded payout of the taxes being collected with the mortgage and got the bonus). Second home, another mortgage, but we were able - because we were with the company credit union - to pay "extra" on the mortgage. So we were able to withstand the rising of rates from 9.5% to 16% and then downward.

Reality is that when you set out to purchase a home you need to build into your calculations a lot of "what ifs". We did that, and we survived, but others did not.

#1.5 Frances on 2017-11-08 00:13 (Reply)

"Deductions" are meant to be for expenses incurred to earn taxable income. The mortgage interest deduction is soviet style central planning designed to encourage people to do something that may or may not be in their best interests.

But how about this compromise - one can deduct mortgage interest if one agrees to pay taxes on any money earned from the property, be it by rental or on sale. And not capital gains taxes, but full 100% income tax net of all proper deductions and with a debit for free accommodation.

Are you in business, or a consumer?

#1.6 Fred Z on 2017-11-08 08:57 (Reply)

Three cheers for Troy Taylor and kudos to Anne Holmquist for not bluntly stating that the restaurant ban on children is really a Two-fer Win: (1) no obnoxious, unruly children, and (2) their whiny, anything-goes-with-Baby-Huey inconsiderate parents. No one will miss them.

#2 Mike Anderson (Link) on 2017-11-07 08:53 (Reply)

The other side of the equation, hard leaned by Vegas in the 1990s: people drink less when they're with their kids, and that's where the money is in the restaurant business.

#2.1 another guy named Dan on 2017-11-07 09:08 (Reply)

Son tried pitching a tantrum in a restaurant when he was about 2, 2 1/2. I picked him up, and we went and sat in the car until dinner was over. Got him into the car seat, told him he wasn't getting dinner until we got home, then just sat in the front seat quietly.

After about ten minutes... "I sorry."

"Okay - but you can't act like that."

"Okay."

Silence.

"I'm hungry."

"You'll have to wait until we get home."

"I'll be good."

"Sorry, no. You're going to have to wait."

No more was said. He got something to eat when he got home, and never did it again.

Parents can control their kids. They need to want to do so - but some think they're supposed to be their kid's friend, and not their parents.

#2.2 JLawson on 2017-11-07 13:58 (Reply)

Pardon my French, but it appears that our ruling class thinks that their noblesse oblige entitles them to droit du seigneur

#3 another guy named Dan on 2017-11-07 08:53 (Reply)

If you are an owner of rental property, then you (whether 'you' refers to an individual or a corporation) can deduct mortgage interest. You can also deduct property taxes.

So if the mortgage interest deduction and property tax deduction for homeowners were eliminated or strongly limited....wouldn't this skew the market in favor of rentals and against home ownership?

#4 David Foster (Link) on 2017-11-07 09:24 (Reply)

No, it would de-skew it

#4.1 Bird Dog on 2017-11-07 10:22 (Reply)

The rental owner is deducting Business expense , buy some rental property and enjoy the deduction, along with all the frustrations and headaches of dealing with renters. from a Former landlord.

#4.2 Oldblood on 2017-11-07 12:02 (Reply)

Animal families

Feminists take note: among all mammals, the primary or exclusive caregiver is the mother.

Horrors, gender roles in nature!

#5 jay on 2017-11-07 09:37 (Reply)

Off topic but I just completed the 30 day pushup challenge but also included sit-ups as well. Will probably continue on with this. Not too difficult now.

#6 jaymo on 2017-11-07 11:09 (Reply)

Restaurants: It's not that the parents can't control their kids, but that they won't.

Nude restaurant in Paris: Seems to me it would attract jihadists.

#7 Sam L. on 2017-11-07 11:42 (Reply)

On mortgage interest deduction...

Trump made a lot of campaign promises, and he is serious about those promises as I have read he actually has a list of them all in the White House, and he crosses them off as he completes them.

One of Trump's campaign promises was his tax plan. And I remember 2 of the details:

1) 15% business tax

2) First $25K for individuals and first $50K for couples would be tax free.

I guarantee you this is what Trump will eventually get. And when you give people that big a chunk of income that is tax free, do you really need that mortgage interest deduction any more? No.

That is part of the reason, I think, you are seeing the interest deduction be taken away for homes worth more than $500k. It would be very hard to do such radical tax reform in one fell swoop. I think getting people used to the idea that some deductions will go away and some people will be filing an EZ form instead of a long form is the idea.

Then, once more MAGA types get into Congress or let the tax reforms prove their worth to the American people, and you can push even more through.

Once you raise the 'zero percent' tax bracket to $25K individual / $50K couple watch the clamor for some of these 'deductions' to go away.

I truly think Trump's ultimate goal is to replace a lot of the individual income tax we've been paying with business taxes and trade deals. We can use the gas tax to cover our infrastructure needs, which is a consumption tax, and I'd be totally FINE with that if my income tax burden went way down.

So, expect more tax reform after this. Don't look at these changes as the ONLY changes that will ever happen. Trump's goal is to free us average Americans from being burdened with federal taxes. PERIOD. We should all be wanting that. Once the majority of us aren't paying these taxes, then the feds are only dealing with the wealthiest and the ones with the most clout in government. Us little guys are trampled on. NO MORE.

#8 MissT on 2017-11-07 13:02 (Reply)

Once upon a time, our country got along just fine without income taxes. Now they are simply an excuse for government at every level to spend money like drunken fools. Maybe we would have fewer wars if the opportunity to tax citizens into bankruptcy were eliminated.

#8.1 jma on 2017-11-07 13:19 (Reply)

You won't get far with rightists on that one, friend. Like citizenship, to them income taxes are sacred privilege. Probably in order to pay for this, another sacred rightist institution in its eternal profits zero sum game..

#8.1.1 Meh on 2017-11-07 13:26 (Reply)

^ link

#8.1.1.1 Meh on 2017-11-07 13:30 (Reply)

The whole reason we never get true 'tax reform' are all of these special carve outs. We need to start being okay with getting rid of special carves out and accepting larger share of income is taxed at 0%. That is KEY to untanging ALL of this unfair tax code that has been built over decades to benefit certain groups.

We should all be clamoring for 0% tax rate on EVERYONE's income. That should be the ultimate goal.

If Trump is what I think he is, he is trying to get us back to the country we used to be 200 years ago. Where we relied on supporting industry within our own country and using trade to support our federal government. That is how it should be.

The feds should not be coming down on individuals through the tax code. Let BUSINESSES deal with the feds. Individuals have pretty much ZERO power with income taxes.

#8.1.2 MissT on 2017-11-07 14:26 (Reply)

I'd be fine with a compromise allow deduction for the first $100,000 of the mortgage. After that, no deduction.

Yes, I do realize that the coasts would get hammered as a result of this. Perhaps those home owners could pressure their state legislature into reducing their state taxes by some amount.

I also want NO deduction for state taxes on federal taxes owed. Yes, it will hit some states harder (mostly the same ones that have outrageous taxes on overpriced homes).

Still, why should the rest of us subsidize those states?

#9 Linda Fox (Link) on 2017-11-07 14:05 (Reply)

Sorry to stray away from today's reading assignments, but I just found this wonderful little speech that I think MFers will enjoy. It is about 12-15 minutes, so sit back with a glass of something and enjoy this piece:

https://www.youtube.com/watch?v=As8XkJNaHbs

#10 faculty wife on 2017-11-07 14:28 (Reply)

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Tuesday, November 7. 2017

Tuesday morning links