Tax Reform? Mortgage Interest Is All About Location

By Ken Berry

According to a new study, the amount of the mortgage interest deduction for taxpayers differs widely across the country, with the biggest deductions claimed by those living along the east and west coasts. Not surprisingly, deductions topped out for residents in upscale areas where home prices are higher than normal. The study could bolster efforts of lawmakers to scale back mortgage interest deductions as tax reform talk progresses. 
Once considered a "sacred cow," the deduction for mortgage interest remains on the table in Beltway negotiations, along with several other items previously thought to be untouchable. 
The report issued by the Pew Charitable Trusts – an independent nonprofit organization and the sole beneficiary of several trusts established by heirs of Sun Oil Company founder Joseph N. Pew – determined that the percentage of tax filers deducting mortgage interest ranged from nearly 37 percent in Maryland to only 15 percent in West Virginia and North Dakota. The disparity between some of the metropolitan areas within states was even greater. For instance, in Texas the deduction rate for the Austin area was approximately four times the going rate for the Odessa area.
The size of the deduction also varies significantly across the individual states. In 2010, the average deduction ranged from $4,580 per filer in Maryland to $1,192 per filer in North Dakota. The study pinpointed the national average at $2,713.
Under current law, a taxpayer may deduct "qualified residence interest" – commonly known as mortgage interest – on acquisition debts of up to $1 million and home equity debts up to $100,000 on a principal residence and one other home. For this purpose, "acquisition debt" is defined as a debt incurred for the construction, improvement, or purchase of the home. Any other home debt, such as a home equity loan or a line of credit, may qualify as "home equity debt." In any case, the debt must be secured by a qualified residence.
A higher concentration of mortgage interest deductions is expected in areas where property values and incomes are on the high side. However, the Pew report notes that other factors could influence the outcome, such as differences in housing turnover and the proportion of tax filers living in rental units.
If the deduction is repealed or reduced, the report indicated that the geographic distribution of the benefits would follow suit, meaning upper-income taxpayers owning high-priced homes would pay more taxes than they currently do. Although there have been calls to eliminate the mortgage interest deduction completely, that doesn't appear too likely. In a congressional hearing held last week that focused on tax breaks for homeowners, there was more support for a modification of the existing rules.
The Pew report didn't make any specific recommendations, but it does show how changes in tax policies could affect the results in the individual states. It also features an interactive map, enabling taxpayers to see the average deduction for their state and zip code.
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