Massachusetts Home Buyer Guide

If the mortgage interest tax deduction were eliminated or limited, Massachusetts taxpayers would be disproportionately hurt because homes are more expensive than in other parts of the country, The Boston Globe reported December 10, 2012. 

Several proposals to change the deduction are circulating around Washington, D.C., including limiting it to the 28 percent tax bracket and lower. Another proposal calls for converting the deduction to a less generous tax credit. Reducing the maximum allowed mortgage balance from $1.1 million to $500,000 is another proposal, as well as eliminating the benefit for second homes and equity loans.

Not specific to the mortgage interest tax deduction is a proposal to place a cap of between $25,000 and $50,000 on all annual deductions, forcing higher-earning taxpayers to prioritize what to itemize on federal returns. Such a cap would effectively eliminate or limit the mortgage interest tax deduction for many individuals in Massachusetts. 

Greater Boston Area taxpayers, like homeowners is other pricey real estate markets, gain the most benefit from the mortgage interest tax deduction because they tend to carry higher mortgage balances and are more likely to file tax returns with itemized deductions. The median price of a single-family home in the Greater Boston Area is nearly double the median price in all the U.S. 

About 25 percent of U.S. taxpayers claim the mortgage interest tax deduction, which is projected to reduce taxes paid to the federal government by about $100 billion in fiscal year 2013. In Massachusetts, more then 31 percent of taxpapers deduct mortgage interest from their tax return.  Massachusetts homeowners average about $11,366 in reduced taxable income by claiming the mortgage interest deduction, compared with $10,640 nationwide.

The real estate industry has long championed the mortgage interest deduction as a reason why people buy a home instead of renting. It was created in 1913 to boost homeownership in the United States.

The National Association of Realtors (NAR) reports that homeowners with a $200,000 mortgage and a 4.5 percent interest rate over 30 years could save $3,500 in federal income taxes the first year. The example above demonstrates that not just wealthly Americans benefit from the mortgage interest tax deduction, unless of course you consider someone who buys a $250,000 home to be wealthy.

Having a tax write off is just one reason people consider homeownership rather than renting (there are a lot of reasons not to want to rent), so the impact on home home prices, especially with less expensive homes, won't likely be as dramatic as the NAR claims.  The reality is that few people factor in the mortgage interest tax deduction when considering the overall affordability of a home purchase. Of course, that's not to say additional taxes paid alone will not impede economic growth. Higher taxes do slow the economy and will in this case too.