Economics

Who Benefits from the Mortgage Interest Deduction?

If the mortgage interest deduction were to be phased out, who would lose out on the subsidy?

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MID

The federal income tax code is riddled with loopholes, deductions, and credits designed to promote various social goals and benefit assorted groups of Americans. One of the largest of these is the mortgage interest deduction (MID), which allowed taxpayers to claim benefits of $82.7 billion in 2010, the latest data available. However, only 32.6 percent of income tax returns in 2010 had any itemized deductions, and 20.8 percent of those did not claim any mortgage interest. As a result, just 22.9 percent of tax filers used the MID in 2010. This has been a relatively stable historical trend, with between 21 and 26 percent of taxpayers claiming the MID each year since 1991. Given the number of recent proposals to change the MID in some way, it is helpful to review which households are claiming the mortgage interest deduction.

Table 1 (below) shows households making $100,000 or more a year constitute 54.9 percent of those claiming the MID, and they receive 78 percent of the deduction's total benefits. The last two columns of Table 1 show the average tax savings that households in each income group receive from the MID, and what those savings represent in monthly savings. The mortgage interest deduction is not the middle-class savior it is made out to be.

For example, families making between $40,000 and $50,000 a year represented 5.3 percent of the mortgage interested that was deducted from taxable income in 2010. This means while there were very few households benefiting, they did get some benefit, averaging out to $737 a year, or $61 a month. If the difference between a family being about to buy a home or not was $61 a month, then the MID might have helped that family buy a home. We suspect that was not a common occurance, but have no way of knowning for sure. 

In 2010, the median household income was $49,277 according to the Census Bureau, so for middle class families the MID was not doing much to help buy a home. If you want to define middle class a bit broader, households making between $40,000 and $75,000 a year averaged a benefit of around $80 a month. Even if that benefit does not mean the tipping point between being able to afford a mortgage or not, it should be clear that for this expanded income range we are still only talking about 27 percent of those who claimed the MID or 6 percent of all taxpayers in 2010.

Who Benefits from the MID

These numbers show that the MID is primarily an upper class entitlement program. At the very least, the mortgage interest deduction should be phased out and the savings applied to deficit reduction. A better solution, as we proposed in Reason's November 2011 issue, would be phasing out this deduction in its entirety and using the savings to give all taxpayers lower income tax rates. This is vastly preferable to giving a select few taxpayers an $82.7 billion tax benefit at the expense of the rest of the country.

This is an updated table from data that first appeared in "Unmasking the Mortgage Interest Deduction: Who Benefits and How Much?" published by Reason Foundation in July 2011.

Download a one-page PDF version of this table here.

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  1. REALTORS? will be thrilled to end this tax deduction.

  2. Typical. The poor subsidizing the rich.

  3. I never realized how big this deduction was until I bought my first home a couple of years ago. Owning a home is literally cheaper than renting for many people. I know this sounds like advocating against my own class interests, but the government needs to stop subsidizing middle class home ownership.

    1. Hmmm. Removing the MID while keeping deductible the interest payments, local taxes, depreciation, and maintenance costs for landlords will favor more people renting rather than owning.

      This is a consequence that we may or may not want.

      1. I see no reason why we have to stigmatize renters. It’s not a sign of being in an underclass, even the rich rent (you really think they *own* those Manhattan penthouse suites?).

    2. Factor in costs of ownership which you can’t fob off on a landlord, and remember that the MID keeps getting smaller and smaller. My calculations showed owning more expensive than renting.

      Another aspect is the flexibility of renting, where you rent or borrow a truck and give 30 days notice. A house not only takes a lot longer, but there are realtor commissions and loan costs too.

      1. So? Who said we have to even things out between owners and renters? If you want to own your home, put up with all the stuff that goes along with it. If you can’t handle all that, rent. It’s worked for me so far.

        1. That was improperly directed at you, SR. I thought you were implying that the deduction is fair and on second look that does not seem to be the case.

        2. I didn’t say we have to even things out between renters and home owners. I said that taking away the deduction would have consequences that we ought to consider in changing something as long-standing and important to people as the MID. We may or may not want the consequences, but there are bound to be some. A bit of thinking before leaping wouldn’t hurt.

          Renting makes good sense sometimes, especially these days. For me, I have a 3-year old house completely paid for whose taxes cost about 1/4 of what it would cost to rent something similar and it still has market value – much higher than a rental deposit refund.

          Renters are always asking where is their income tax deduction and I tell them that their landlord got it.

          1. Landlords don’t get a deduction for interest, they can write it off as a business expense. So after they take the rent from the tenant (paid for with after-tax money), they apply it to their mortgage and other operating expenses and then pay taxes on what’s left. At least, this is the case for apartments like the one I live in.

            1. I meant “landlord” in the sense of the “landlord’s business”. One way or another there is an interest deduction that benefits whoever owns the rental property. The “landlord” because of competition or through generosity may or may pass some of this on in the form or lowered rent. Or not.

              1. But it’s just a typical business expense or interest deduction. Since owner-occupants aren’t in business, there’s no reason for them to get a break relative to renter-occupants.

      2. To rent or not to rent! That is the question.

        I still meet for dinner with my former investor friends and we often talk about this. One of them says renting is under rated. Owning a house is more expensive over the long-term and people forget to factor in EVERY SINGLE cost into that when calculating their return on a house.

        Even in business there are two types of people. Those who don’t mind renting space and those who want to own. The former because it’s less of a hassle the latter because they want to own to stop paying down the road. And, if the business flops, at least they own a property asset.

        I currently rent. It’s true I’m “giving” away money but then again, I couldn’t afford to buy at the time and I DO own a business now. That thinking may change down the road.

        What about cars? Lease or buy?

        Last, for what it’s worth, MID isn’t allowed in Canada.

        1. What about cars? Lease or buy?

          From what perspective? If you are a glamor whore, I suppose leasing is the way to go.

          If you do not want to always be shoveling money into a depreciating asset, buy used and drive it into the ground.

        2. I bought primarily because I don’t want to be paying rent when I retire. I’m also looking at it as an inflation hedge. I have a fixed mortgage, rather than a rent that keeps rising (and gets jacked up to the sky when there’s a housing boom).

          On the downside I’m now tied to the property, otherwise I would have packed my bags and left California this year. Seriously.

    3. My first home was also cheaper than renting but it wasn’t because of the deduction. The deduction was a marginal portion of the savings.

    4. REDUCTION IN TAXATION IS NOT SUBSIDY!

      Socialist jackass. To call this a subsidy is to imply that the govt owns everything I earn and when they allow me to keep any of it, they are subsidizing me.

      Fuck that.

    5. Why? Why shouldn’t you be able to keep your money?

      You are not being subsidized. The fact that the deduction exists just means real estate prices are higher.

      The people selling mortgages to you are the beneficiaries, since their industry expanded.

      Rather than end this deduction there should simply be additional deductions for renting and for saving money for a down payment.

  4. They’d better put our MID’s in a lockbox AND KEEP THEIR HANDS OFF THEM!

    1. Think of the revenues if they abolished it retroactively? Collect some back taxes from those engaged in “legal tax evasion” by exploiting the “loophole”.

  5. Sometimes dude you just gotta roll with it man!
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  6. I’ve been a Realtor for 23 years. There is zero moral justification for the mortgage deduction and, like most government efforts to “help”, it likely hurts home owners by artificially raising prices BECAUSE of the benefits of the deduction.

    That said, it would be lunacy to take away this deduction except by phasing out over 15 – 20 years. Housing values are crucial to the economy – which the recent downturn has made even more clear. Removing this deduction,suddenly, could have convulsive effects on the whole economy.

    1. The economy is crucial to itself. To think that the economy will suffer without that deduction shows a remarkably rigid mind which can’t think past the next sentence. You may as well claim that a rock in a stream is crucial to the stream because it shelters fish and slows down the water. The stream will be just fine with or without the rock.

    2. And you know what? They are still way too damn expensive, and oversupplied.

      Face it, times ain’t as fat as they used to be.

      I couldn’t tell you the number of buildings that have been sitting empty for YEARS going to shit (well, the ones that aren’t already covered in LITERAL shit, anyway), while their owners are too damn stupid/deluded to understand that they are NOT worth what they thought they were worth when every moran (GET A BRAIN!) with a pulse thought he was going to get rich buying and selling real estate.

    3. Assume a $750000 home with 20% down leaving a $600,000 mortgage at lets call it 3.75% to a buyer.

      His monthly payment is ~$2775 a month.

      During the first 5 years that would break down to around $1850 a month in interest and $925 in principal with the interest paid starting to measurably fall.

      $1800 a month in interest payments means a MID of $22,200. Assuming all of that is in the 25% bracket it equates to tax savings of $5500 annually or $462 a month leaving them with a net mortgage of $2310.

      Eliminating the MID and giving the same buyer with $150,000 down a mortgage of $2310 a month at 3.75% would make for a home price of $650,000, a 13% reduction in the homes price.

      So basically you are saying that if high end homes prices decline 15% (with low end homes declining a far smaller percentage in value) the entire economy would collapse?

    4. Let housing values fall. Where I live, people are crowing that house prices are back to pre-crash levels. What no one wants to mention is that pre-crash levels are by definition bubble levels.

      1. Ditto. Houses shouldn’t be investments, they should be residences.

  7. I live in San Rafael, CA. This place is full of Dems. The thought of the MID being cancelled…well, it makes me feel just like Chris Matthews when he got a thrill up his leg. I would love it and will be unable to stop laughing at my stupid neighbors who have mortgages in the $300 to $500k range.
    If they were stupid enough to assume the MID was set in stone, they deserve what they get. Me? I saved my money and bought when prices were more reasonable. If I had to buy today, I’d live elsewhere.

  8. Figures… I’ve spent the last 2 years scrimping every fucking penny to save up for my down payment for a first. Planning to in on the Fed’s ridiculous interest rates before the shit hits the fan.

    1. “Planning to” opt into the Fed’s

    2. Well, don’t let this stop you. Just buy a house you can afford without a subsidy.

      1. This

    3. If they ended the MID for all new home sales prices would drop…fast.

      Lower prices = more “affordable housing”.

  9. The effect of removing the mortgage interest deduction will also be to lower prices. OK, maybe not so much for homes that lower income people buy. But consider the typical middle class household in the wealthy Bay Area. A moderate single family home in a good neighborhood starts at about $1 million. Condos are similarly expensive. Myself and my neighbors are all upper earners — software engineers, lawyers, etc — and both spouses are working. Some people get back at least $12,000 (federal and state). On top of that is the property tax deduction, although if you’re in AMT you don’t get this deduction.

    Now the fact that you’re getting money back means you can pay more for the house. I was paying rent of about $2300 (rent payments include property tax the landlord will pay). The mortgage is $3000, and if there was no deduction of about $1000 a month then I probably would have continued renting. More likely, many other people would have not either, and thus house prices will fall.

    I don’t agree with the deduction as it introduces a distortion in the market. It would be nice to eliminate the deduction completely, and maybe phase it out over time. (Under current law, you can only the deduct the mortgage interest on $1.1 million of loans.)

    But note that when property values fall then property tax collections fall. So government unions lose too. You can expect there to be new parcel taxes, a raise in the base property tax rate, etc.

    1. I know it’s expensive to live in the SF Bay Area, but your statement that “A moderate single family home in a good neighborhood starts at about $1 million” is not true.
      I’m 46 and have lived here my whole life, so I know what I’m talking about. San Rafael is a nice place to live and you can get a nice single family home for $500 – $600k. If you are looking for a home on the peninsula, then you are correct. That’s what happens in Silicon Valley when it’s “good times!”

      1. San Rafael is very far out. My friend’s home in Hayward, CA is even cheaper and underwater. OK, I should be specific — San Francisco, Peninsula, Santa Clara. Still, even at $600k, people might not buy at that price were it not for the mortgage interest and property tax deductions.

        1. Don’t forget the Lamorinda area — hard to find anything there under $1 million as well. But it does come with the state’s best school districts, so the money you save on private school you can spend on housing.

    2. But note that when property values fall then property tax collections fall. So government unions lose too

      So you are saying it is a win/win?

  10. Refraining from taking someone’s money is not an “expense” except to those who consider that the state has first dibs on wealth, and alone retains the right to decide who benefits from money someone else earned. There’s no such thing as a tax break that is a “cost” or “expense,” except to that pathetic entitlement mentality. The money refunded to those who earned it never belonged to the state in the first place.

    1. Yes, but the government also shouldn’t use deductions to incentivize specific behavior. Without the deduction, more people might rent, people might choose a different house, home prices would be different, etc. Any deduction like this is a governmental manipulation of the market.

      1. I agree that the government should not be in the business of jerking people around in order to achieve ends it considers desirable. But unless the mortgage interest deduction is replaced by some other equivalent reduction in taxes for people who now benefit from it, its elimination would simply be another confiscatory fix for a government addicted to spending. A single low flat tax, for example, would be an acceptable trade for the morass of deductions now in place.

    2. I guess a an unmarried low-earning renter should be happy paying for vacations, new cars, and schools for wealthy people.

      1. *I guess that an unmarried…

    3. +1000

      I’m in favor of anything that keeps resources out of the gubbmints nasty, thieving, murderous blood-stained claws.

  11. Notice the steep drop when income hits $200k? The AMT phases out deductions like mortgage interest and local taxes as income goes up from there.

    This is a middle-class (lower middle in New Jersey) benefit, it’s meaningless for a family with two high earners.

  12. The mortgage interest deduction helps to balance out the onerous and immoral property taxes I and many others have to pay in perpetuity (whether we have children in public school or not), and which have a tendency to go up and up and up over time.

    Want to get rid of the mortgage deduction? Get rid of my property taxes as well and you’ve got yourself a deal. Otherwise, go to hell.

    And I wish that libertarians would stop referring it a “subsidy” when we’re allowed to keep more of the money we earned. Stop using Saul Alinsky’s lexicon; we should say that the government is being nice enough to steal from us less.

    1. While I do agree with you about wishing to keep more of the money we earn, I’m not sure I agree with you on the MID. MID is a distortion of the housing market, and is at least partially responsible for the housing boom/bust. I mean, it was mostly due to low interest rates and irresponsible lending and borrowing, but MID has gone hand-in-hand with that. It really is welfare for the middle class. It isn’t all that different than the student loan debacle; gov’t offering low interest, unlimited debt to pay for an education the individual may or may not have pursued otherwise, and has caused a boom and will inevitably bust. And if I’m not mistaken, you can deduct the interest on your student loan debt as well. Again, not saying it’s directly responsible for the bubble, but it is definitely adding fuel to the fire. The fact that it allows you to keep more of your money, which under normal circumstances I would be in favor of, doesn’t seem to be a valid excuse to keep it, when you consider the far wider damage it is causing to the market.

    2. ^This (times 1000). People focus on what’s being “given” and don’t factor in what’s also being taken away. If you really want to bring moral change to society stop focusing on miniscule things like deductions and here and there, and start focusing on making the tax code as a whole more simple and moral. Whether one group of people is a net beneficiary or loser is too immense for anyone to comprehend because there’s just as many hands taking as there are “giving.”

      1. By ^This I meant Mike M.’s comment.

    3. Renters pay it too. It’s included in the rent.

  13. This is vastly preferable to giving a select few taxpayers an $82.7 billion tax benefit at the expense of the rest of the country.

    I agree with the idea of phasing out the MID and reducing rates for everyone, however, in what universe is allowing some people to keep $82.7 billion dollars of their money “at the expense of the rest of the country”? Isn’t this just another example of the fallacy that all the money is really the government’s and we should just be greatfull that they let us keep a little?

    1. Yes but its being subsidized by the nation. Any money back is good, yes, but it has to come from somewhere as the government doesn’t produce anything of of its own.

      1. “but it has to come from somewhere as the government doesn’t produce anything of of its own.”

        It comes partly from the pockets of the people that are supposedly being “given” something through the MID.

        1. And partly from some of those who aren’t.

  14. The way the numbers are presented in the table seems questionable. Incomes up to 100K are shown in increments of 10K and 25K. Then you have the single range of 100K to 200K. Of course that percentage is going to appear high.

    Apples to apples…
    0 to 100k: 45%.
    100k to 200k is 41%.

    I would be interested in seeing the 100k to 200k range in 10K/25k increments.

    Ultimately, I’m just not sure I can accept the statement “These numbers show that the MID is primarily an upper class entitlement program” based on how the data is presented.

    I’m not advocating for or against MID. I just don’t care for data being presented in such a way to “spin” a POV.

  15. When did 100k become upper class?

      1. SERIOUSLY… (apparently I need new batteries in my keyboard).

    1. Thirty years ago, maybe.

  16. I’ve wondered if we eliminate the MID and replace it with an across the board reduced tax rate for everyone then what might happen is more people may be able to afford to purchase homes since everyone gets to keep a little more of their money. As it is now only those who can afford a home get a deduction and no matter what political bent you are that is not fair since it singles out certain groups as more deserving of deductions than others. Much like the deduction for children, I didn’t tell anybody to have children it was their choice so why should my tax dollars be used to support their deduction.

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  18. I’m a middle class earner (well under $100k) who has benefited from the MID. In fact, if I didn’t receive it, I would have trouble staying afloat. Until just recently, I was stuck in an interest-only loan on my house. The deduction allowed me a significantly larger refund at tax time which for the last 5 years went directly to paying down debt and making necessary purchases. Money in the hands of the people will always be far better spent than money in the hands of the government.

  19. Letting people keep their income is to an entitlement.

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