Housing tax breaks and mortgage deductions result in $175 billion in forgone revenue to the U.S. Treasury annually, say Andrew Hanson, Ike Brannon and Zackary Hawley of the R Street Institute.
The federal tax code grants homeowner taxpayers a number of breaks, allowing them to deduct interest up to $1 million paid on mortgage loan debt, to deduct $100,000 in debt backed by home equity, and state and local property taxes. Capital gains from the sale of primary residences are also exempted from taxes. Ultimately, these tax breaks benefit the wealthy and simply encourage the building of larger homes.
- The value of the mortgage interest deduction -- the most popular of the housing tax breaks -- varies depending upon income and location. Looking at Chicago taxpayers earning less than $100,000, fewer than a quarter of them take the mortgage interest deduction, saving an average $1,900. For taxpayers earning over $100,000, 78 percent take the deduction, saving 2.5 times more than the former group.
- The typical suburb of a major metropolitan area has somewhere between 1.5 times and 2 times the amount of taxpayers taking the mortgage interest deduction.
- The reduction in housing costs due to the tax breaks vary depending upon locale. In Atlanta, the breaks reduce the annual homeowner cost by less than $2,000, compared to more than $10,000 in Los Angeles.
- The breaks do not induce homeownership, but instead encourage upper-income tax filers -- filers who are not on the margin between purchasing and renting -- to purchase larger homes. Houses today are between 250 and 1,000 square feet larger than they would be, thanks to the tax breaks.
Moreover, most income tax filers take the standard deduction, rather than itemize their deductions (which would include the mortgage interest deduction). For these families, the tax breaks offer no relief, and the benefits increase disproportionately with income.
Source: Andrew Hanson, Ike Brannon and Zackary Hawley, "Homesick: How Housing Tax Breaks Benefit the Wealthy and Create McMansions," R Street Institute, April 2014.