exc-55ac08c2e4b00b679963dd89
On a thirty-year mortgage at 5% interest, about half of our total payments to the bank end up being interest payments.
In the Netherlands, Switzerland, and the United States, taxpayers can deduct their full mortgage interest payments from their taxable income. The reasoning is that this makes it easier to own a home, which some argue saves a family money in the long run and of course builds asset value, where rental money is “gone forever” in a sense. In the United States, at least, the reasoning is that we want to help people own homes because it’s a good long-term investment for middle-class families.
But if we look at it another way, the biggest winners in the tax may not be middle-class families.
The higher one’s income, the more likely one is to own a home:
It’s also the case that those with higher incomes own more expensive homes, almost at a linear rate (if you make twice as much money, your home is on average worth about twice as much).
(“Housing and Income”. Licensed under CC BY 2.5 via Wikipedia)
Something to consider: looking at this from the lens of tax policy, it’s a highly regressive tax: those that make the most money are more likely to buy and buy bigger. This means that if they get a mortgage, they get far larger tax deductions than those with lower income who either get cheaper houses or just keep renting.
Some states (like Massachusetts) give some state-level tax deductions for rental income, but these deductions are for much less than half the rent, and state tax rates are lower than federal ones. From one perspective, one could say that lower-income renters are subsidizing tax-breaks for higher-income owners.
Is there real value in providing tax breaks to help people buy homes? Is this something we should continue as-is, stop, or modify in some way? Let us know your thoughts in comments below.
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The chart looks at it the wrong way. It's about getting people into homes. 90% of the taxpayers are in everything but the top level. Between 60-70% of the remaining population is in the "better than 50% likely to own a home" category. So it helps an awful lot of people get their foot in the door, which allows them to save and build equity, which makes it more likely they will do well.
Also there's no adjustment here for the alternative minimum tax, which limits deductible benefits from high income earners with high deductibles. IOW, they don't really get the full benefit of the mortgage income deduction, particularly if they renovate.
There is also a cap on the amount of mortgage interest one can deduct.
http://www.ntu.org/foundation/page/who-pays-income-taxes
https://en.wikipedia.org/wiki/Alternativeminimumtax
I agree with Chris McAdam below. These tax deductions incentivize home ownership and strengthen the middle class.
While I believe the effective tax rates for the wealthy are too low, this is not one of the problem areas IMHO.
Chris - good points, and I'm wondering in the long run (since the 1930's when home mortgages started to outnumber farm mortgages) whether the tax break on mortgage interest has simply pushed up real estate prices as compared to incomes. That is, there aren't necessarily more people who can afford homes becasue of this tax break - the whole population that makes up the demand curve gets that same benefit.
Realtors and Mortgagees (the banks, isn't that a funny english picadilo?) are the ones benefiting from this artificially price-inflated market.
It's hard to say. History shows home mortgage interest has been deductible since the income tax was legalized.
It is possible that ending deductibility for all other interest made mortgages more attractive to people.... surely refinancing happens in part for that reason.
A much more likely scenario is the tax-free status for capital gains from sale of a primary residence is responsible for the rise in home prices.... Ending THAT would be a mares nest.... imagine looking to trade up your house and losing 18% of your equity because of taxes owed on your "gain" that you need to buy your next house.
However, this does make a solid retirement plan for those living in more expensive areas.... live in a house, improve it, sell it when you retire and move someplace with much lower housing costs (like Florida or Nevada, for instance) and use the gain as part of your retirement nest egg... using that approach, homeowners directly benefit. I confess to this being part of my retirement plan
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