On the endangered list? Mortgage interest deduction

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The mortgage interest deduction has been the tax break with nine lives, but the new, incoming Congress may pose an existential threat to the policy.

The deduction has been up for dissolution under both the Reagan and Bush 43 administrations. President Reagan famously committed to the measure when he told the National Association of Realtors that he wanted to “preserve the part of the American dream which the home mortgage interest deduction symbolizes.”

George W.’s tax advisory panel advocated complete elimination of the tax break, although the measure failed to gain any traction during his administration. And last week the deduction lived to see another year when President Obama’s deficit commission couldn’t garner enough support to bring the proposal in front of the House.

But the deduction debate likely did not die there.

Congress has a clear mandate to reduce the deficit, and many believe that with the subject broached, it will find its way back to the Republican-controlled Congress for closer inspection.

Amid all of the deficit-hawking in this new decade, there couldn’t be a worse time for supporters of the deduction to have to defend it, and the size of the tax break doesn’t help. According to Bill Ahern at the Tax Foundation, the deduction is the second-most expensive tax break on the books, and will cost the federal government $104 billion this year.

Real estate interests, not surprisingly, are alarmed.

“We understand the need to fund our country, but we just don’t believe that this is the way to go,” said Colorado Association of Realtors chief executive officer Robert Golden. “Having that deduction is a great concept, particularly for first-time homebuyers. Changing it will just add an additional burden to a market that is still trying to recover.”

To be clear, the proposal brought forth by the deficit commission would not have eliminated the deduction altogether. In fact, many argue that the proposal wouldn’t have affected middle-class homeowners at all.

Under the deficit commission proposal, the deduction for eligible mortgages would have been reduced from $1 million to $500,000, but would eliminate the deduction for second homes. In addition, the proposed version would only affect tax filers who itemize deductions, not those who take the standard deduction.

Still, the deduction has been especially important for Coloradans, where families with expensive vacation homes have been benefactors of the tax break. According to the most recent IRS data, Colorado ranked third amongst states in the percentage of returns claiming the deduction, and fourth in average deduction amount.

Almost 35 percent of Coloradans took advantage of the deduction in 2008, and those taxpayers received an average deduction of $4,594.

“The second-home issue in Colorado is huge,” Golden said. “Activity is slowly picking up in Vail, Aspen, Telluride and Steamboat right now, and that second-home deduction can be a big incentive.”

The debate over the deduction has long been a sore spot between free-market economists and the real estate industry. Some economists argue that the incentive encourages reckless consumption while artificially inflating housing prices.

Golden said that his association is not against reasonable tax reforms, but rather is wary of taking out the knees of a staggering recovery.

“We don’t go ballistic whenever this comes up. We listen, try to understand, and try to work towards rational solutions,” he said. “But proposing this when the market is healthy is one thing. When the market isn’t healthy, this would just contribute to continued pressure.”

For now at least the deduction is safe, but everyone is gearing up because when both sides are starving, the other side’s sacred cows start to look like a tasty meal.

Christmas bonus

Real estate professionals needing to renew licenses in the coming year will be catching a break. The Colorado Division of Real Estate has reduced renewal fees for licenses across the board, and it’s the priciest menu items that have seen the largest reductions.

A subdivision application, which would have run you $4,000 last month, will only cost $1,000 going forward; the Corporate, Partnership, LLC application that used to cost $1,000 has been cut to $200, and the Temporary Broker application has also been cut from $1,000 to $200.

Unfortunately, the division has no control over reversing other price trends in the market.

Jonathan Easley can be reached at jonathan.easley@csbj.com or 719-329-5208. Find him on Facebook or Twitter.