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Housing tax breaks and the deficit

By Kay Bell ·
Tuesday, July 5, 2011
Posted: 11 am ET

Are the tax benefits that homeowners get worth their costs to the U.S. government? That's a question that's being asked more often as Congress continues to struggle with ways to deal with the deficit and devise the fiscal year 2012 budget.

Homeownership tax breaks are not in the mix right now, but once we get past the immediate debt ceiling and fiscal budget crises, you can be sure that the issue will come up again.

The Pew Charitable Trusts recently issued a study of the costs and benefits of housing tax subsidies. The top tax breaks, which include the popular itemized tax deductions for property taxes and mortgage interest payments, total around $304 billion in fiscal year 2010.

The study acknowledges upfront that in addition to budgetary implications, housing tax breaks provide benefits and homeowners and the overall economy. The tax benefits encourage homeownership, which most agree promotes stronger and more stable neighborhoods.

On the other hand, however, homeowner tax subsidies distort the housing market. We're still working through one downside of this. The mortgage interest deduction is a contributor in people borrowing more money for larger homes than they might otherwise buy.

Now I'm not letting the greedy bankers who issued the questionable loans or the homeowners themselves who should have had better financial sense off the hook. But it's a fact that the tax argument has always been used as a mortgage lender's lure and a homebuyer's rationalization for a home loan.

One piece of data from the Pew report that should catch the eyes of homeowners, wannabe homeowners, renters, housing industry trade groups, their lobbyists and lawmakers in Washington, D.C., is the fact that wealthier Americans benefit most from current housing tax subsidies.

The average home-related tax benefit for the lowest income category is $370, according to Pew. Home-owning families in the highest income category, however, receive a tax subsidy that averages almost $18,000.

A key reason for the wide difference is that the interest deduction's tax value increases with the size of the mortgage; the bigger the mortgage, the greater the tax benefit.

The benefit also rises with a taxpayer's marginal tax rate, which explains in part, says Pew, why higher-income taxpayers receive a disproportionate share of the benefit.

The Pew report suggests several alternatives to the current housing tax subsidies, detailing the proposals' impact on homeowners and the U.S. Treasury. The major change would be to do away with all the housing tax breaks. As deficit panels created by both Presidents Bush and Obama discovered, that's not going to happen.

But tweaks could be made to the mortgage interest deduction, which alone is estimated to account for $80 billion of housing tax subsidies in fiscal year 2010. The deductible amount could be limited or it could be converted to a refundable tax credit that would benefit more homeowners.

Personally, I would end all second-home tax breaks.

All suggested homeownership tax breaks will be difficult to sell on Capitol Hill. But the discussion needs to begin.

Does your house provide you with big tax breaks? Would you be willing to give up some of the tax benefits to help reduce the deficit?

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Christopher Truss
August 23, 2011 at 7:59 am

Thank you. Hadn't thought about the tax aspect of the subsidy. But for a single home with a jumbo mortgage of $400k and interest rate of 5% the actual tax saving for having the mortgage would be 0.05 x 400000= 20,000 reduction in AGI saving about $7000. Is that correct?
The reason I ask is my children are being told they get very large tax saving by having a mortgage and I think it is being hyped somewhat. They get the tax deduction whether they pay cash or carry the mortgage. They are being told by someone they "need" a mortgage to establish credit rating. My point is that they will be reducing monthly cash flow by $2100 (P&I) in order to save $7000 a year.

Kay Bell
August 03, 2011 at 4:42 pm

Christopher, the Pew survey looked at all the housing tax breaks. The wealthiest homeowners counted not only deductible mortgage loan interest but also the property taxes they got to write off. In some cases, they had multiple properties that qualified for the deductions. The highest income level is very small, but made up of the very wealthiest, so a five-figure tax cost to the government is not out of the question for these homeowners.

Christopher Truss
August 03, 2011 at 4:31 pm

"The average home-related tax benefit for the lowest income category is $370, according to Pew. Home-owning families in the highest income category, however, receive a tax subsidy that averages almost $18,000."

I am confused. I don't think it is $18000 in my pocket. I think you reduce AGI by $18K so the tax saving is more like 35% of 18K which is $6000 in your pocket.