What Could the Fiscal Cliff Mean to DC-Area Homeowners?

• December 7, 2012

by Shilpi Paul

As the holidays approach, the Obama administration and Congress are in the midst of heated negotiations regarding the impending fiscal cliff. One of the many items on the table for discussion is the mortgage interest deduction, a policy that benefits homeowners but may be in danger of being eliminated.

The mortgage interest deduction incentivizes home ownership by lowering an individual’s tax burden: homeowners can deduct any interest paid on their mortgage, often a significant amount, from their taxable income. Some believe that taking away the deduction would hurt the economy by causing home prices to fall. The Obama administration has been in favor of capping the mortgage interest deduction on high-income households. (Mitt Romney was in favor of capping all itemized tax deductions).

Recently, RealEstate Business Intelligence (RBI) took a look at how many homes sold in the area so far this year would be impacted by a $35,000 mortgage interest deduction cap. See a breakdown (those affected by the cap in red) in the charts below:

Courtesy of RealEstate Business Intelligence

RBI cited this analysis from Econ 70 regarding limiting the deduction:

“If all 1040-Schedule A deductions, including the mortgage interest deduction are capped at about $35,000, then homeowners with houses priced north of $500,000 would be the ones primarily affected, and their homes would fall in value. Interestingly, they might respond by reducing charitable giving. If, however, the deductible amount is limited to 80% of total deductions, then all itemizers would be hurt, and many more houses would decline in price.”

This article originally published at http://dc.urbanturf.com/articles/blog/what_could_the_fiscal_cliff_mean_to_homeowners/6405