The government is looking for ways to increase revenue, yet at the same time it is trying to find a way to make these tax changes acceptable to middle-class voters. One of the ways that this can be done, and in fact may be done, is to reduce the amount of money that someone can deduct from his income taxes based on mortgage interest rate payments.
At present, it is possible to deduct all interest rate payments that are part of the mortgage of the home you live in, or a second home that you own. This way, rich people get a major tax advantage. If the mortgage rate interest payment is removed as a deductible item, it will probably apply only to people who are perceived as rich.
I think it is unlikely that there would be a removal of this deduction for all homeowners. The reason for this is obvious: the housing market is just barely in the early phases of a recovery, and if existing housing owners lost their interest rate deduction, some of them, possibly millions of them, would be forced to sell. That would be unacceptable to people in the housing market. Realtors and their lobbying groups would put enormous pressure on Congress not to remove the interest rate deduction for middle-class homeowners.
I am going to make the assumption that Republicans in the House are willing to impose taxes by the back door. They will do this by removing tax deductions. The most obvious one that they could get away with politically is probably the interest rate payment on homes that are owned by people who are considered rich. The fight will be on defining which people are considered rich.
There may be some form of deduction. Maybe there will be a limit on how much money somebody can deduct. Maybe there will be a limit in terms of the percentage of the total payment that he can deduct.
The negotiations at this point are still a matter of theory. Even though the fiscal cliff presents itself on January 1, Congress is still in the back room stage of the negotiating process. It is all guesswork as to what, if anything, they are going to be able to come up with that Pres. Obama will sign. But my guess is that the mortgage interest deduction for people with gross incomes above $150,000 a year is probably on the chopping block.