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Mortgage interest deduction not working

Anthony Randazzo

Anthony Randazzo

Join the conversation. Vote on the mortgage interest deduction at the bottom of this article.

Dean Stansel

Dean Stansel

 

By Anthony Randazzo and Dean Stansel

Special to InsideRealEstateNews

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, which allowed taxpayers to claim benefits of $82.7 billion in 2010, the latest data available.

The deduction of mortgage interest from federal income taxes subsidizes homeownership, making it more affordable to become a homeowner.

Or so we’ve been told.

It is a highly popular tax break, yet one that is not without criticism.

For example, it turns out the mortgage interest deduction (MID) primarily benefits those who would choose to own homes anyway while encouraging them to simply buy bigger and more expensive homes.

Those who are on the margin between renting and owning tend not to itemize deductions, thus they cannot benefit from the MID. As a result, if the goal is to increase the homeownership rate, the MID is an ineffective tool.

Furthermore, it creates a distortion in the choice between financing owner-occupied housing with debt or other assets, and in the choice between investing in residential real estate or other assets.

Despite its popularity among voters, the mortgage interest deduction has long been a target for reform. Most recently, proposals during the fiscal cliff negotiations at the end of 2012 had the MID in their sights.

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.

The Joint Committee on Taxation data shows households making $100,000 or more a year constitute 55 percent of those claiming the MID, and they receive 78 percent of the deduction’s total benefits.

The MID saves middle-class households making between $40,000 and $75,000 a year an average of around $80 a month. The MID is not the middle-class savior it is made out to be.

Anthony Randazzo is director of economic research at Reason Foundation and Dean Stansel is an economics professor at Florida Gulf Coast University. They are co-authors of the report Unmasking the Mortgage Interest Deduction.

 To read an opposing point of view, please visit this InsideRealEstateNews.com link.

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Editor’s Note: This is the first of a regular feature in which guest columnists will provide opposing viewpoints on a real estate topic.

Have a story idea,  real estate tip, or a point-counterpoint debate topic?  Contact John Rebchook at  JRCHOOK@gmail.com.

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