Another intriguing possibility would be to leave the deduction in place for the remaining life of all existing mortgages -- while at the same time also applying that rule to any mortgages that are currently in place on foreclosed homes. This would make those homes very appealing to prospective buyers (knowing they can take advantage of a tax break that may not be available if they buy a regular home), wouldn't it?
I don’t think a gradual removal would help. The market would instantly factor it in, in some net present value sense.
It’s funny though, we keep arguing about putting the burden on our kids. Even on the standard deduction, you get an exemption on your kids (unless you live in a high price area and your spouse works, in which case you probably get zero). If you believe in the subsidy argument, then that also is a subsidy (no offense to the kids). Childless people still pay a school tax (probably one of the worst inequities). Its all a mess and picking on this one deduction is sort of like being shot with 100 bullets and deciding that if you just got rid of this one, it would be better.
The real argument for BobL is not that he is subsidizing someone else’s debt, its more a sense that everyone feels they are paying a larger share of the ever expanding government pie. If you are a high income person, you feel you are subsidizing people in lower brackets. If you are childless, you are subsidizing the eduction of others. The underlying problem is the government is taking too damn much money from all of us. And anybody’s attempt to improve their situation by buying a house, investing in 401(k)s, 529s or anything else should not be causing bitterness towards that person. It takes our focus off the real problem in DC.
Or one could just provide an above-the-line housing expense deduction, capped at the median housing expense in per ZIP code (local jurisdiction would be an alternative to ZIP code) to level the playing field between renters and buyers.
This would make those homes very appealing to prospective buyers (knowing they can take advantage of a tax break that may not be available if they buy a regular home), wouldn't it?
Prospective buyers would not be able to take advantage of the tax break since they would have to take out a new mortgage loan with non-deductible interest in order to buy the house.