Are You a Home Owner Just For the Tax Break?

As a Realtor, I’m in the loop and a part of the massive “call to action” machine that goes into motion anytime local, state or national governments appear to be heading toward regulations or changes in the law deemed harmful to the real estate industry and its consumers. The latest call to action is regarding the recent debt commission recommendation to scrap the mortgage interest deduction enjoyed by those home owners who itemize tax deductions.

The National Association of Realtors is coming out strongly against any change in the mortgage interest deduction (MID). Since I’m not a mindless Realtor drone, I do have opinions that differ from my industry on a number of subjects. On this one I have more questions. First, let’s see what NAR has to say:

“As the leading advocate for housing and home ownership issues, NAR firmly believes that the mortgage interest deduction (MID) is vital to the stability of the American housing market and economy.

The MID must not be targeted for change. NAR is actively engaged on behalf of the nation’s 75 million home owners and 1.1 million Realtors® to ensure that the current deduction is not modified as was recommended in the Deficit Reduction Commission report released today.”

You can read the entire position statement here. I’m disppointed that it contains no actual data, statistics or substantive supporting argument, but instead just general statements saying, basically, this would be a bad idea. Come on NAR. Where’s the beef? In exactly what specific way would the elimination of this tax deduction jeopardize the “stability of the American housing market and economy.”? I mean, that’s a pretty big assertion.

OK, I understand the basic NAR position and mission of trying to keep things in place that are good for home owners. But I am also vaguely aware of the fact that not many people itemize their deductions on a Schedule A in the first place. Most take the standard deduction, making the MID a mute moot point on their particular tax returns. And many people pay no mortgage interest (1/3 of homes are free and clear) or don’t pay enough to deduct. So they are unaffected also. Who does that leave to absorb to feared repercussions?

How many home owners, or prospective home owners would, upon elimination of the MID, throw their hands up in disgust and scream (think George Costanza’s parents…) “That’s it! I’m selling my home and renting for the rest of my life! They’re not going to get away with this“?

Or, “Honey, let’s cancel the home search. If we can’t deduct the mortgage interest, it just doesn’t make sense to give up the pleasures of renting, and moving from home to home every couple of years”?

I dare say I don’t think many, if any, home owners or prospective home owners would forgo all the benefits of home ownership based solely on an ongoing income tax policy. So, who in fact might be affected by the elimination of the mortgage tax deduction and would it in fact ruin the real estate market, home values and the U.S. economy?

A quick internet search provided some of the data I’m looking for. From a Tax Foundation article, some IRS statistics about the MID, who takes it and why.

“Despite the claims of various industry groups that the home mortgage interest deduction is an important factor promoting broad-based home ownership, IRS data show the bulk of mortgage interest deductions are claimed by a relatively small fraction of Americans with incomes well above average. As a result, it is likely that the deduction primarily encourages larger and more expensive homes among a relatively small share of taxpayers, rather than promoting broad-based home ownership among ordinary Americans.”

This is what a reasonably informed person would intuit even without knowing any specific data. The article additionally claims:

There are four key factors causing the home mortgage interest deduction to be more valuable for high-income earners than low-income earners.

First, to claim the mortgage interest deduction, taxpayers must itemize when filing federal tax returns…low-income taxpayers are less likely to itemize, placing the benefits of the home mortgage interest deduction out of reach.

Second, low-income taxpayers tend not to own homes, especially those who are younger and live in urban areas. Additionally, many low-income retirees tend to have less interest outstanding on home loans—i.e., their home mortgages are “paid off”—and rely primarily on Social Security income which is not included in AGI. This reduces the tax benefit of the home mortgage interest deduction to them.

Third, high-income earners tend to have more valuable homes. In general the greater the home value, the greater the interest payment on the associated mortgage. As a result, the President’s Advisory Panel on Federal Tax Reform has criticized the home mortgage interest deduction for primarily encouraging the construction of larger homes, and not necessarily broadening home ownership among middle-income Americans.

Finally, speculators in real estate markets—those looking to hold a specific piece of real estate for a small period of time—tend to both earn high incomes and prefer interest-only mortgages. Both of these characteristics lead them to claim a disproportionate share of the tax benefits of the home mortgage interest deduction.

See NAR, that’s how you lay out your arguments, and the article contains charts, stats and links to other data and information. I’m sure there are valid counter-points to the above assertions and this will all be debated hotly by our moron sensible representatives in Washington, and I’m not taking a side per se, but my intuition and common sense tells me that there is a long list of powerful and compelling benefits of owning a home, and those benefits can’t be destroyed or eliminated by taking away a perk enjoyed by a proportionately small percentage of American home owners. In fact, we need to stop encouraging so many people to own homes, especially those for home home ownership does pose a financial risk and burden they are unprepared to handle.

Therefore I find this to be an interesting topic to follow, but I’m not in an uproar and I’m not responding to the “call to action”. Sorry. We, as a country, have to address our deficit somehow, and I think everything should be on the table for discussion.

Ultimately, as a home owner, I can’t think of a stupider and more irrational decision I could make than to quit owning my own home just because I can no longer deduct my mortgage interest on my income taxes. I suspect the majority of the small minority who actually do enjoy the mortgage interest deduction probably feel the same as me.

23 thoughts on “Are You a Home Owner Just For the Tax Break?”

  1. Removing the tax deduction won’t cause current owners to suddenly sell their homes and become renters. The tax deduction is an incentive for renters to become buyers and the tax deduction is priced into current home prices. A quick removal of the deduction will harm the residential real estate market by both removing one of the buyer’s incentives and by causing a slight downward realingment of home prices. The current fragile home market (much more so in markets other than Austin) would definitly see negative effects from this. It is similar to low mortgage interest rates, a buyer isn’t going to change their mind about buying soley because rates are at 4.75% instead of 4.25%, but lower rates do act as one of the incentives to act and certianly affect sales prices.
    I did read an economist’s report that quantified the tax deduction’s relationship to house prices but I couldn’t find it with a quick search. I agree the government shouldn’t be subsidizing current industries, but suddenly taking that incentive away will wind up being more disruptive to the economy in the short term than the benefit in the long term. It is fair to put these subsidies (hopefully with agricultural subsidies) on the table, but if they are going to be removed they should be phased out rather than cut in one year.

  2. All true, but I’m pretty sure the NAR has always known this. It’s just a little tough for them to reverse course after teaching the drones to shout “tax benefits!” at every potential home buyer. Frankly, this is the first time I’ve seen a realtor even question the concept, so it’s been pretty effective as far as propaganda goes.

  3. Thanks for the comments, and the grammar reprimand.

    This link does spell out some assumptions in detail, from NAR, but they seem hard to believe. Basically average house values would fall $17%, or $29K.

    It’s not clear to me whether/how they back out the standard deduction though. In other words, if the average interest deduction is $12K, then I assume the 2010 standard deduction of $11,400 for a married couple was not utilized. If a filer has no other deductions, such as medical, then taking away the $12K would leave the $11.4K, right?

    Maybe I’m over-simplifying. I’m sure it’s very complicated and depends on a lot of stuff. Nevertheless, as someone who’s worked with many buyers, I’ve never heard one even mention the tax deduction when talking about motivations and what they hope to gain from owning a home. Instead, buyers talk about other stuff. I’m just not able to connect the dots to a $29K average price drop across the board, per the above link.


  4. This reminds me of when they change the tax brackets and they claim that people will stop working as hard. I know of plenty of people who have gotten a raise that has meant they’ve gone across a tax bracket and their new tax rate has meant they didn’t get a raise at all. Yet in those cases I’ve never known a single person to refuse the raise.
    Tax rates can have all sorts of economic impact, but I think very few decisions are made based upon some sum of money that may or may not be involved at the end of the year.

  5. I hate to pile on with the grammar corrections, but there is one particularly egregious error given that the context is to call someone or something stupid! I don’t believe “stupider” is a word!

    Although I am not an anti-regulation libertarian as I suspect you are, I agree with the content of today’s post. The problem for me, however, is that I just purchased my very first home one year ago. The mortgage interest deduction was a detail I certainly considered when making my decision. I’m not sure it is fair for the government to bait me into buying a home with a first time tax credit and then yank away my tax deductions after the fact once I’m already trapped in a 30 year note with a high cost to exit. It seems to be current notes should be grandfathered in so that future buyers can make a decision with new information and recent owners are not victims of a bait and switch. I’m young. Almost 80% of my mortgage payment goes to things other than paying down principle. This would not be right so soon after I entered a contract.

  6. “I know of plenty of people who have gotten a raise that has meant they’ve gone across a tax bracket and their new tax rate has meant they didn’t get a raise at all. Yet in those cases I’ve never known a single person to refuse the raise.”

    Hard to imagine how this could actually happen – I think you got sold a bill of goods on this one, since tax brackets (rates) don’t apply to all your income; only your income over a certain threshold.

  7. Steve, you’re forgetting the property tax deduction and charitable contribution deductions. The interest deduction by itself is usually less than the standard deduction, but taken together with the others, it bumps up the total itemized deductions to where they have a significant impact on someone’s taxes.

    For example, my interest is only $5k a year, but since property taxes in Texas are outrageously high, I pay another $5k in taxes, and I also claim sales tax deduction, so my total itemized deduction is $11k. In a 25%+ tax bracket that’s significant savings.

    At least here in Texas, the removal of this deduction will significantly affect property values and school district budgets.

  8. RC, the government makes changes to tax law all the time that affect people who made decisions based on previous tax law. While it would be nice to be able to exempt people with older notes, the bookkeeping aspect of this would be monstrously complicated – and would effectively function as yet another giveaway to the older crowd that got us into this mess to begin with. Better to rip off the band-aid quickly in this case.

  9. Tim: The higher tax bracket threshold will only apply to the income that crosses that tax bracket line, so the raise would still be of value, as M1Ek ponts out.

    Likewise, the deduction amount one can place into line 40a of the form 1040 (tax return), whether the standard deduction or the Sch A itemized amount, can serve to drag people down across a bracket line into a lower bracket, thus making the deduction most valuable to people in higher brackets because the deduction is enjoyed at the highest taxable rate.

    For example, a couple earning $93,800 AGI and taking the $11,400 standard deduction (or the same amount in interest deduction from sch A) will have lowered their taxable income to $82,400, which is the cutoff for the 25% -> 28% bracket lines for 2010. Therefore, the $11,400 deduction, were it not taken, would be taxed at 28%, representing a $3,192 difference in the amount of income tax owed. A different tax payer in the 25% bracket gets a tax break of $2,850 on the same deduction amount.

    But really, my post went to the actual behavior of buyers. If the mortgage interest deduction was permanently eliminated today, are there buyers currently looking, right now, who would stop looking and decide to remain renters? I’m saying there is not, or very few if any. I’m not saying the impact would be zero, I’m just saying the impact is being overstated by those wanting to protect the deduction.

    Part two, NAR’s point: will all the buyers who keep looking now and into the future start offering less for the home they want because they’ve now somehow done the math and calculated the optimal price required to recapture, or duplicate the lost benefit provided by the interest deduction, and thus home prices will fall an average of $29K (17%) across the board? I don’t think so. I just don’t see $200K homes suddenly selling for $171K overnight because buyer demand craters.

    RC: Thanks for helping me with my grammar. Some of my bad writing is intentional and stylistic. “Stupider” is on purpose, “mute point” was not. I also occasionally use “ain’t gonna” and stuff like that. But I do feel less stupider having been enlightened about moot vs. mute, so thanks. 🙂

  10. Also if the homeowner tax credit is figuring into a first time buyer’s math – they can’t afford the house and the Realtor should tell them so.

    >>M1EK it used to happen around $60k (haven’t looked at it recently). Especially married-file-jointly with no dependents.

  11. Ron: Point taken, thanks.

    My point/question remains, given that the American consumer, by and large, makes major purchase decisions based on immediate emotional gratification, regardless of long term financial implications (ie.brand new cars, consumer junk on credit cards, etc), to what degree is the mortgage deduction a primary motivator in the minds of buyers?

    Let me state it another way. Suppose we want to intentionally declare an end to the “American Dream” of home ownership. What would be the best way to kill that dream and also endanger the “stability of the American housing market and economy”? Could it be accomplished by simply removing the mortgage interest deduction? Would it be that easy? Or would people keep buying houses anyway?


  12. In my case, the MID made no difference in my home purchase 10 years ago. I was “pre-qualified” for a loan 3 times bigger than what I borrowed, however. If I had cared to borrow the maximum, the MID would have made a difference, I’m sure.

    I am perfectly happy in my Area 10S home, and I am very happy my payment is not 3 times higher, even if I have to pay more taxes because of it.

  13. I agree, removing the tax deduction will have a short term impact but long term will have no effect. If you want to see an example look no further than Canada where the housing market is doing very well – and they’ve never have a tax deduction for interest.

  14. Tim, the only places that ever happened were at inflection points where certain odd tax credits would expire – it doesn’t happen because of brackets (mathematically impossible – even if the bracket after 25 was 99, you’d still make 1 cent more on every dollar over that amount).

  15. I think there will be a short and long term impact. Removing MID may not keep a buyer on the sidelines; the more likely effect is that it will potentially change the affordability equation for some buyers. Low interest rates do not get people jumping off the couch to go buy a new home, despite record low rates. But once a buyer is in the market the rate affects what their total cost of ownership is going to be. A 4.x% rate in today’s market would allow a first time buyer to move up to a slightly larger home for the same monthly payment as they would have been spending a few years ago with 6% rates.

    The same thing, with an albeit smaller impact, would happen with MID. Does everyone take in to account the tax savings when calculating their total cost of ownership? No. Do enough people that it would make an impact in the market? IMHO, yes.

    The last point I will make is around standard vs. itemized deductions. We In TX are one of the fortunate few that do not have state and local income taxes. Those taxes are deductible, and amount to much more of a deduction than we are allowed in standard sales tax rates. Granted, many of those states have lower property taxes, but their total tax burden is still higher than in TX (at least for the 4 other states that I have lived in).

  16. Steve: I’d hate to give up on the American Dream of home ownership. Capitalism has worked because folks that own things have an interest in maintaining their value. Folks that borrow or rent just don’t. Doesn’t matter if it’s tools, cars, apartments, or houses. The ones that are owned may or not be well-maintained. But they’re much better off than the ones that are rented.

    So instead of giving up on the American Dream of home ownership, why can’t we just try to set appropriate expectations? Not everyone is going to get a huge house with acres of land. Folks might have to live in a house the same size as the ones their parents grew up in — or smaller. But it would be theirs. Just because some idiotic speculators pushed folks into bad loans doesn’t mean we shouldn’t try to get people into good loans. But it also means that we need to be building more affordable housing (where affordable can mean a house/condo in the city that schoolteachers can afford). So, where’s the next Meuller infill project going to be built?

  17. Here is a link to the history of the Mortgage Interest Deduction. It’s well written and provides a lot of details that are probably unknown to most people. It’s a good, informative read. I’ll excerpt and summarize below.

    From the article:
    “Mortgage interest deductions didn’t really come into play until 1913, when the Constitution was amended to allow for a federal tax. Few people other than farmers had mortgages, so it was inconsequential to the federal government’s revenue stream. The home mortgage deduction was just lumped in with all types of interest payments and expenses that were allowable deductions for both businesses and individuals.”

    In other words, when the assertion is made by defenders that “the mortgage interest deduction has been in important part of American Home Ownership for 100 years”, that’s simply not true. No decision was ever made to enact a specific mortgage interest deduction. ALL interest was deductible for ALL businesses AND individuals from the very inception of Federal Income Tax. And back then, mortgages hardly existed, so the MID wasn’t even important. The 100 year argument about the MID being sacrosanct is bogus.

    From the article:
    “But up until the 1930s, a mortgage was rare. Most people would simply pay cash for a piece of property. Even as mortgages started to come on the scene, they weren’t much of a loan. Typically, you would be required to put 50 percent down, and the balance was paid over five years. It’s a long way from the zero-down 30-year mortgages that fueled the housing boom a couple of years ago.”

    ” .. change in interest deductibility occurred with the Tax Reform Act of 1986. At that time, the ability to deduct interest on most types of loans was stripped away. The mortgage interest deduction survived as part of a goal to promote home ownership. But the law of unintended consequences took hold, and people quickly circumvented the law with home equity loans as a way to still deduct the interest on capital used for personal purchases, like a car. In many ways, this change in the tax law encouraged people to borrow against their homes. The subsequent reduction in equity for the average homeowner no doubt worsened the impact of recent declines in home prices.”

    So, it really wasn’t until 1986 that the full potency of today’s modern version of the Mortgage Interest Deduction came into existence. And saying that the outcome of keeping it has been, in the long run, “good”, for home owners or the economy is a position which I think is very much open to debate, as is the prudence of making home equity loans as easy to obtain as a candy bar from a vending machine.

    From the article:
    “Fannie Mae grew by leaps and bounds. In 1968, President Johnson privatized Fannie so he could remove it from the federal budget and create the illusion of an improved fiscal condition…The bubble was being inflated, and it finally burst when overly creative financial institutions completely derailed the system with casino-style manipulation of mortgage securities, while politicians simultaneously stirred the pot by demanding that home ownership was a right to be granted, rather than a privilege to be earned. It was a perfect storm that blew over what was an already fragile house of cards.”

    Read the entire piece if you have a chance. I think it really calls into question the entire premise of using home ownership via cheap/easy loans and tax manipulation as a means of social good. I personally think it should be a lot harder to buy and own real estate, everyone should put down at least 20%, and the benefits of home ownership should be limited solely to the innate values of having one’s own home, not tax benefits.

    Finally, to those who say that home values would fall with elimination of or adjustments to the MID, isn’t that the same as saying that values remain artificially inflated by this policy? And what have we learned about artificially high home values and the results of that?


  18. I can definitely say the ONLY reason I am buying a home is the mortgage interest deduction. I need the deduction since I have a high income, no children, and single. I make too much to benefit from the student loan interest deduction and credit from contributing to a Traditional IRA.

    What you fail to realize the number of single professionals without children purchasing homes. I read somewhere that is the trend and just in my peer group at least 4 people have purchased homes based on the mortgage interest deduction.

  19. Valerie, the benefit of this deduction is only available at your marginal tax rate, i.e. somethimg like 28%. How does spending an extra dollar to save 28 cents make any sense as a ‘need’?

    Certainly depending on the rental market it could be a smart move – but a ‘need’?

  20. Adam has some convincing points about the perception of one possible benefit of owning a home with a mortgage. It’s just one more reason people will have to delay or not buy a home if they think there will be no benefit. And to bait all these FTHB’s int owning a home and then yank the deduction out a real concern of the attitude of our political leaders. I feel they look at people as just a source to take more money fro to give to the government because they think the government is better at deciding how to spend the money for our benefit.

    I could see home values dropping further for sure if this gets cut.


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