Atax break that has long been untouchable could soon be in for some serious manhandling.
Many home buyers deduct mortgage interest when assessing their tax bill, a perk that has helped bolster the income of millions of families — and the broader housing market.
But as President Obama and Congress try to hash out a deal to reduce the budget deficit, the deduction looks vulnerable. Limits on a broad array of deductions could emerge in any deal.
It is likely that any caps would aim at high-income households and would diminish or end the mortgage tax break for many of those taxpayers.
One of the reasons the mortgage tax break is so vulnerable is that both Democrats and Republicans have recently favored capping deductions.
With the mortgage interest deduction, households realized tax savings of $83 billion in 2010, according to the Reason Foundation. Nearly $65 billion, or 78 percent, went to households earning $100,000 or more.
There is a range of ways to increase tax revenue by aiming at higher earners, some less comprehensive than others. For instance, the interest deduction relating to second homes could be ended. Also, the cap on mortgage debt eligible for the interest rate deduction — currently $1 million — could be reduced.
Under current rules, a high-earning household deducting $20,000 in interest payments would probably apply a 35 percent rate to that amount and receive $7,000 in tax savings. The Obama budget aims to limit that tax saving by capping that rate at 28 percent. If that rate were applied to $20,000 of interest payments, the saving would fall to $5,800.
One argument against curtailing the mortgage deduction is that it could reduce demand for housing and depress home prices. The National Association of Realtors believes ending the deduction could reduce property values 15 percent, according to a presentation last year by its chief economist, Lawrence Yun.
Other analysts say they believe the housing industry overstates the potential impact. With several forms of government subsidy supporting housing, it is hard to single out the effect of the mortgage deduction. At most, Reason Foundation estimates, the deduction may bolster house prices by 3 percent.
Since any deduction cap is likely to aim at higher earners, expensive houses would be most affected. But big-ticket homes appear much more resilient to shocks than lower-cost ones.
CoreLogic tracks data that effectively divides the market into higher- and lower-cost houses. Prices of the higher-cost houses are up 5.9 percent since the start of 2005, before the housing crash. Houses at the lower end have fallen 13.5 percent.
Given the apparent sturdiness of the higher end of the housing market, politicians may decide there are few risks in effectively capping mortgage deductions for high earners. Limiting tax breaks in a way that could reduce mortgage relief would be a change.
Nick Kasprak, at the Tax Foundation, said that until recently he didn’t expect to see a cap on deductions. ‘‘But now,’’ he said, ‘‘it seems both parties are open to pursuing this strategy.’’
Peter Eavis writes
for The New York Times.