The Mortgage Interest Deduction Dilemma

This week the New York Times ran an article in the real estate section titled Who Really Benefits from Interest Deductions. It seems that there are discussions in Congress and in the platforms of both parties about whether or not to maintain the homeowner mortgage interest deduction, modify it, or get rid of it entirely.

There’s huge support among the general populace to keep it, though many aren’t taking advantage of it.  It seems that most taxpayers who could take advantage of it are not itemizing their returns, thus critics say that it’s wasted on them.  According to one source, only about 30 percent of taxpayers itemize.  It’s unclear why they didn’t try to come up with a percentage of those who own homes that do not itemize, as it could tell a dramatically different story.

In what could be considered a “duh” statement, studies show that the majority of itemizers are upper-middle and upper-income households, and the people who tend to derive the greatest dollar benefit from the mortgage interest deduction are households earning between $100,000 and $500,000 annually.  It seems that about two-thirds of the benefit go to that group in the 80th to 90th income percentiles.

The article also addresses the obvious in stating that these higher income people have more money and are more likely to buy expensive homes and also second or vacation homes that also qualify up to $1 million for the deduction.

While the article speaks only to the benefits of the mortgage interest deduction to certain income levels and the fact that many don’t take advantage of it, there is no mention of the economic influence of these upper-income purchasers of more expensive properties.  There should be some influence on economic and construction activity that benefits the GDP and the economy.  Someone is building these homes, and suppliers and manufacturers are making the materials.

The good news is that real estate investors aren’t really a part of this equation, as mortgage interest on rental property is deductible as a business expense.  If anything, killing the mortgage interest deduction for home buyers may actually move some from the buying mode to becoming long term tenants.

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