There’s no ‘Plan B’ if mortgage interest deduction goes away

Moe Veissi, the new president of the National Association of Realtors, didn’t even blink an eye when the sensitive question was raised. It wasn’t an elephant-in-the-room topic, but it was close.

“There’s a lot maneuvering on Capitol Hill,” the reporter said. “If the mortgage interest deduction is in jeopardy, what’s Plan B”?

“We have no Plan B,” replied Veissi, a tough, savvy Florida resident and former chairman of NAR’s political action committee. “We are absolutely opposed to any measure that might weaken our industry, and we are quite confident that we are going to prevail.”

The mortgage interest deduction (MID), along with the capital gains exclusion on a primary residence, availability of funds for jumbo loans and the streamlining of the short-sale process, are the key national topics concerning most Realtors, according to a 2010 survey.

While the MID is most likely to remain intact for primary residences, any cuts in the incentive likely would first be directed at second homes.

“Here’s a statistic that most people don’t know about,” said Richard Mendenhall, a former NAR president. “Eighty to 90 percent of all the personal property tax paid in the United States is paid by homeowners. Now when people say the mortgage interest deduction is a perk, I tell them we’re already paying most of the load. It would be a huge tax increase for homeowners.”

The mortgage-interest deduction is not a dollar-for-dollar tax deduction; it reduces taxable income. The maximum limit is a combined $1.1 million on first and second homes. A flat tax would nullify both. Also on and off the table has been a 15 percent credit on some mortgage amounts. The 15 percent credit would only be for mortgages up to a certain limit, say $500,000. In other proposals, not only would interest on home-equity loans no longer be tax-deductible, but also out the window would go deductions for state and local property and income taxes.

Before 1987, mortgage interest on all residences could be deducted without limit. Since then, consumers with more than two residences are required to choose two “qualified” residences where mortgage interest could be deducted, but the selected residences are allowed to be juggled into the “qualified” category from year to year.

Daniel Webster Johnson, an agent specializing in recreation homes in Breckenridge, Colo., told a session at the NAR convention in Anaheim that he doesn’t believe eliminating the MID for second homes would hurt his business.

“In 1984, Australia stopped all capital gains-free sales and started charging taxes on most transactions,” Johnson said. “We all thought the market would plummet and we’d all be out on the street corner looking for a job. Well, it last about three months. … People will wake up the next day and decide they still want the property.”

Veissi credited second home buyers, especially international investors, for turning around the South Florida market. An estimated 10-year supply of condominiums has been reduced to seven months due to cash transactions by investors looking to hold the properties for long-term rentals.

Cash, probably as much low prices brought by oversupply, has made the difference in Florida. Financing for second homes has become scarce, with some lenders demanding 30 to 40 percent down payments.

Look for NAR to put all its lobbying muscle behind keeping the mortgage interest deduction in place. They are not about to let homes – first or second – be hit any harder.

In fact, the group is so confident it doesn’t have a Plan B.