Why We Need the Mortgage Deduction

A single-family home. Image: SanjibLemar, Wikimedia Commons

In the tax debates of the last four years, the mortgage-interest deduction has taken a beating. The conventional wisdom is that the deduction isn't fair, and that it isn't helpful. It isn't fair because it primarily benefits upper-income taxpayers; homeowners in low tax brackets often cannot benefit from itemizing instead of taking the standard deduction, and some low-income elderly homeowners no longer have mortgages at all. It isn't useful because homes aren't a particularly good investment compared with stocks or other financial assets. The conventional wisdom is wrong on both counts.

Lower-income families receive more tax benefit -- and high-income taxpayers substantially less -- from the mortgage-interest deduction than from either the deduction for state and local income taxes or that for charitable contributions. Taxpayers with incomes above $200,000 (one frequent definition of "rich") receive more than half the benefit of those deductions; they receive less than 20 percent of the benefit from the mortgage interest deduction.

In 2007, the last year before the Great Recession, over 41 million families claimed the mortgage-interest deduction, more than the number claiming either the deduction for state and local taxes or the deduction for charitable contributions. More than 11 million of them were in the lower half of the income distribution -- again, more than the number claiming the other two deductions.

About three-quarters of homeowner families with a household head younger than 65 have a mortgage; almost 90 percent of them itemize. Among older families, only one-quarter have a mortgage, but of those who still do, almost 85 percent claim the deduction. By the time the head of the household is 30 years old, more than half of all American families own their own home and are able to benefit from the mortgage interest deduction, and they continue to benefit from it for most of the rest of their lives.

Moreover, the deduction is useful -- useful to families and useful to the country. Families' ability to deduct home-mortgage interest today makes a difference in their lives for the future.

As homeowners pay down their mortgages over time, the value of the equity in their home becomes a substantial share of their wealth. For most of the last 25 years, homeowners' equity has constituted about a quarter of total household wealth, about as much as their ownership of stocks (including the amounts in retirement accounts and mutual funds) and more than the value of unincorporated businesses and commercial and rental real estate combined.

Together, these categories constitute three-quarters of total household wealth. But unlike the others, home equity is distributed widely among American families. The other assets are concentrated among the richest households. For families in the lower half of the income distribution, home equity accounts for more than half of total net worth. For the wealthiest 1 percent, home equity is less than 15 percent of wealth.

Even after the Great Recession, widespread homeownership is the most important factor helping to reduce the extent of wealth inequality in the United States; certainly, the distribution of wealth in America is not flat, but it would be even more skewed if most families rented instead of owning homes. It is ironic that many of the people who are most worried about economic inequality in the United States are also vigorous opponents of the mortgage-interest deduction.

Most of us benefit now from the mortgage-interest deduction, or did in the past, or will in the future. And it will make a difference to our economic wellbeing.