Mortgage Interest Deduction: Part 3

This blog continues a series (see the blogs…Mortgage Interest Deduction (Pts 1 & 2) dealing with the mortgage interest tax deduction benefit for homeownership. This benefit again is part of potential “tax reform” as it goes before the Congressional House Ways and Means Committee.

The National Association of Home Builders (NAHB) has chosen to address the assorted, and continued, criticisms, and the following are a further analysis of the NAHB assessments.

Critics of the mortgage interest deduction (MID) claim that the deduction “incentivizes buyers to purchase a larger home.” The NAHB acknowledges that though the interest deduction is “sometimes connected with larger homes,” the connection is based mostly on the demographics of family size, as opposed to wanting the deduction for a “bigger is better” approach to homeownership.

According to the NAHB, “analysis of IRS data confirms this. Taxpayers with two personal exemptions (a measure of family size) who claimed the MID had an average tax benefit of $1,500. Taxpayers with four personal exemptions had an average benefit of approximately $1,950. In fact, the benefit increased correspondingly from one dependent to five-plus personal exemptions, which is consistent with the notion that larger families require larger homes.”

Critics say that taxpayers are subsidizing vacation homes for the wealthy, since mortgages on second homes also qualify for the mortgage interest deduction.

Other factors besides vacation homes can enter into second home deductions say the NAHB, such as, owners who sell one home and buy another primary residence in a tax year can claim interest on both homes on their annual tax return. In addition the rules also allow homeowners who are building a new home to claim construction loan interest as a deduction as well.  Also, “according to an analysis of the Consumer Expenditure Survey, the average income of a household with a mortgage on a second home is $71,344.” Not exactly the wealthy.

The NAHB points out that though homeowners do get this tax benefit, “this focus ignores the fact that homeowners pay property taxes that are not collected on other forms of investment. For example, owners of owner-occupied and rental housing pay approximately $300 billion a year in property taxes to local and state governments. Such tax burdens should not be ignored in federal tax debates when considering the overall effective tax rate on housing.”