Reining In Mortgage Interest Write-offs

Referencing the Seattle Times article Tax-legislation Plans Bound To Surface Next Year, it is easy to at first dismiss the headline as so much typical legislative money hunting by elected officials. But upon complete review, some good points are raised by Ken Harney, syndicated columnist to The Times. Case in point: when homeowners pull more than $100,000 in equity out of their homes via refinance, then spend much of it on vacations, cars, and credit card debt, should they be allowed to write off all of the interest? Currently, they are, even though they aren’t supposed to, and the IRS doesn’t have the means to regulate the validity of such write-offs. What is being proposed is to provide the IRS with some simple tools, or flags, that will assist in identifying those that abuse refi interest.

Tools would be:

1. notification sent to the IRS by lenders for refi’s in excess of $100,000

2. notification if the mortgage interest currently reported to the IRS is for a purchase mortgage or refinance

Another tax problem is the property tax write-off. It is said there needs to be a differentiation between “property taxes” and “improvement assessments”. Taxes are taxes, and homeowners should not be taxed on taxes that are paid. However, often included in your tax statement are assessments for neighborhood improvements which significantly increase property values. The idea is to exclude such value improving assessments as tax write-offs.

Lastly, there is the “points” issue. Points collected by the lender as pre-paid interest on a mortgage are supposed to be amortized over the life of the loan. Most folks use the entire amount in the tax year that the loan was initiated. This sounds like poor IRS oversight, and should be easily remedied without legislation.

What are your thoughts on these matters? What does your legislator think?