Does Mortgage Interest Tax Deduction Encourage Debt Or Home Ownership?

Industry Observer

There seems to be a consensus among real estate salespersons and their professional association that mortgage interest tax deductions play an integral role in facilitating home ownership.  There are numerous solicitations based on, at least in part, the advantage of a tax deduction for "owning" over renting.  By definition, those solicitations are aimed at first time home buyers.

Often, first time buyers have relatively low income and buy relatively low priced homes.  Their mortgage debt does not generate enough interest expense to gain benefit from an itemized tax return over the standard deduction.  Many first time buyers gain no tax advantage in owning over renting.  The expected  tax advantage is effectively a myth.  They may be happy to enjoy the lifestyle upgrade often associated with owning over renting, but the tax advantage for their debt is non-existent.

How about the move-up buyer?  Let's say that, for example, a homeowner sells his/her/their home with enough capital gain to make a down payment and cover sales and closing costs on a $375,000 house.  Their debt would be about $300,000, and a 4% loan would generate around $12,000 in interest the first year, decreasing incrementally each year as the principal decreases.  That $12,000 debt interest represents around $3,000 in tax savings in the first year.  If they couldn't afford the payments without the tax deduction, they may be forced to carry only a $250,000 loan with the first year's interest a little lower.  Let's see, could they still move up to a nicer house?  I think so.  Could they save money with a lower priced home and lower debt?  I think so.  So, would the lack of mortgage debt interest deduction hurt them?  I doubt it, and it could ultimately help them.

How about the folks who have paid off their mortgage and no longer are able to deduct debt interest?  Well, they may be happy to continue to be home owners, but they may not be happy to know that part of their tax burden is the result of others who have been convinced to carry high debt on their homes. 

Prior to the presidency of actor-politician Ronald Reagan, all consumer interest was deductible.  Reagan ended deductibility except for mortgage debt interest, and then the home equity loan business thrived.  Buy a car and take out a loan?  Take out a home equity loan and deduct the interest.  High balances on the credit cards? Take out a home equity loan and pay them down to zero.  If the deductibility of mortgage debt had been ended with all other consumer debt interest, our housing crash may have been just a little less severe. 

So, who is helped by keeping mortgage debt interest deductible?  Homeowners? Real estate salespersons?  Banks?  Nobody?  I guess it's a matter of opinion, and I obviously have one.

Posted by

 Mike Carlier  Lakeville, MN




Comments (7)

Kristin Johnston - REALTOR®
RE/MAX Platinum - Waukesha, WI
Giving Back With Each Home Sold!

I hope to pay off my mortgage soon so I wont be getting that deduction on my primary residence

Nov 18, 2016 11:35 PM
William Feela
Realtor, Whispering Pines Realty 651-674-5999 No.

I don't see it doing anything.  Never have a client talk about these deductions as a reason for buying

Nov 19, 2016 01:49 AM
Mike Carlier
Lakeville, MN
More opinions than you want to hear about.

There is a valid reason for not paying off a mortgage.  If you can earn a higher return than the interest charged, it may be worth not paying off.  There are lots of relatively low risk preferred stocks issued by companies with excellent balance sheets that pay 6-7% interest. 

Nov 19, 2016 03:44 AM
Chris Ann Cleland
Long and Foster Real Estate - Gainesville, VA
Associate Broker, Bristow, VA

The mortgage interest deduction is definitely oversold in our business.  You and I are like minded there.

Nov 19, 2016 04:57 AM
Chris Ann Cleland
Long and Foster Real Estate - Gainesville, VA
Associate Broker, Bristow, VA

Featured in the group:  BARTENDER, MAKE IT A DOUBLE.

Nov 19, 2016 04:58 AM
Robert Vegas Bob Swetz
Las Vegas, NV

Hello Mike

I agree with you and Chris Ann and your post has been featured to the group:


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Nov 20, 2016 08:50 AM
Gene Mundt, IL/WI Mortgage Originator - FHA/VA/Conv/Jumbo/Portfolio/Refi
NMLS #216987, IL Lic. 031.0006220, WI Licensed. APMC NMLS #175656 - New Lenox, IL
708.921.6331 - 40+ yrs experience

I can't say that I have clients that really ask questions or discuss this feature and benefit of homeownership, Mike Carlier.  Most find it beneficial come tax time ... and it may figure in on their list of positives aspects of buying.  But a primary reason for purchasing?  I've never found that to be the case ...


Nov 28, 2016 02:11 PM