Mortgage interest deduction may be capped to ease deficit

Any created caps likely would be aimed at high-income homes.

A tax break that has long been untouchable could soon be in for some serious manhandling.

Many homebuyers deduct their 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 Barack Obama and Congress try to hash out a deal to reduce the budget deficit, the mortgage interest deduction looks vulnerable. Limits on a broad array of deductions could emerge in any budget deal.

It is likely that any caps would be structured to aim at high-income households and would diminish or end the mortgage tax break for many of those taxpayers.

“This is definitely a chance worth jumping for,” said Amir Sufi, a professor at the Booth School of Business at the Uni- versity of Chicago. “For a fixed amount of revenue, it’s better to remove deductions than increase marginal tax rates.”

Such a move would be fiercely opposed by the real estate industry. The industry has played a crucial role in defending the tax break, even as other countries with high homeownership have phased it out.

One of the reasons the mortgage tax break is so vulnerable is that both Democrats and Republicans have recently favored capping deductions, including both Obama and the recent Republican presidential nominee, Mitt Romney.

What is more, deductions could be used to grease a compromise in the budget negotiations. High earners would be hit most by deduction limits, something that might make Republicans recoil. But the party may tolerate such a policy in return for a deal that limits how much actual tax rates go up for high-income households.

Tax numbers suggest it may not be hard to structure deduction limits in a way