Representative Keith Ellison (D-Minn) has introduced H.R. 948 which would, among other things, offer a 15% tax credit for mortgage interest paid. Providing a 15% tax credit will benefit lower income taxpayers who do not itemize. The credit would be in lieu of the current mortgage interest deduction. That means higher income taxpayers who are paying mortgage interest can still elect to deduct rather than claim the 15% credit. But the bill also proposes to phase out the deduction so that no deduction will be allowed as of 2022.

Most scholars criticize the existing deduction as an unwarranted interference in the free market by artificially inflating home prices. Most politicians don’t think repeal is popular with their constituents and worry that repeal would cause home prices to fall. But a phase-out has some attraction. Britain did something similar some years ago and the effect on housing prices was minimal.

Ellison also thinks the $1.1 million limit for qualified debt is too high. He says that 94% of homes sell for $500,000 or less. And so his proposal also would limit qualified debt to $500,000. And here’s an interesting observation. He wants that limit to apply per residence, which is exactly the principle that the 9th Circuit disagreed with under the current statutory language. See the Voss case. I blogged about the case on August 17, 2015.  Go to law.scu.edu/same-sex-tax/mortgage-interest-deductions-for-unmarried-couples/

Here’s what his proposed statute provides:

“(2) OVERALL LIMITATION. — The aggregate amount of indebtedness taken into account for any period for purposes of this section shall not exceed $500,000 ($250,000 in the case of a married individual filing a separate return or unmarried individuals filing separate returns for the same property).”

So how does this affect a situation in which two married couples go in together and buy a home together, maybe a vacation home to be shared? If each couple files a joint return then under the above language, I think each couple can claim $500,000 of qualified indebtedness. So this proposed statute contains a marriage penalty and a marriage bonus: two single persons in a couple can claim qualified debt of $500,000 each so long as the debt was secured by two different homes (marriage penalty for the married couple who cannot do this), but if the debt is on the same home they will be penalized compared to two married couples who have the same arrangement (marriage bonus for the two married couples).

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