After the National Association of Realtors agreed to pay $418 million and eliminate the 6% commission to settle the lawsuit against it, attention in some quarters is now being turned to the mortgage interest deduction.
Given the wave of anti-real estate investor legislation, it would seem like the mortgage interest deduction is the next domino to fall. But not all “falls” are created equal. The fact of the matter is that the mortgage interest deduction is not particularly important. Removing it would have a negligible impact and is most certainly not a hill for real estate investors to die on.
For one, the mortgage interest deduction only amounts to a tax savings of around $30 billion a year (down from $60 billion after the Tax Cuts and Jobs Act of 2017). That may sound like a lot, but it’s important to put this in context:
So, in the end, the mortgage deduction is small potatoes.
What the Mortgage Interest Deduction Is, and What Eliminating Would Do
The mortgage interest deduction simply allows homeowners who itemize their deductions to deduct interest payments on up to $750,000 of their loan principal. (It was $1 million until the Tax Cuts and Jobs Act of 2017.)
This is not actually a particularly large deduction. Remember, the standard deduction is $14,600 for single filers and $29,200 for married couples filing jointly in 2024.
Most homeowners still have mortgages that were taken out before rates skyrocketed in mid-2022. So, for example, if someone has a $750,000 loan amortized over 30 years at 3% interest, the annual mortgage interest would only amount to $22,809.59, which is actually less than the jointly filed standard deduction. But even on a $750,000 loan amortized over 30 years at 7% interest, it only amounts to $52,258.65 of interest in year one (and less every year thereafter).
In the highest tax bracket as of this writing (37%) that would amount to saving $19,335.70 on one’s taxes versus just $10,804 for the standard deduction for those filing jointly. That amounts to a savings of $9,335.70. Not bad, but nothing to write home about.
This is why it shouldn’t be surprising that the mortgage interest deduction only results in $30 billion of savings each year, or about 0.68% of what the federal government collects in tax revenue.
Now, if someone has multiple other deductions like charitable donations or medical expenses, the total savings from the mortgage interest deduction in the previous example could be as much as $19,335.70 over and above the standard deduction. But the only people saving this amount would be affluent.
This is the primary criticism of the mortgage interest deduction, namely that it amounts to a regressive tax (or tax break, to be precise), which is the key point its critics make. As Katheryn Anne Edwards tells Bloomberg:
“The policy’s weakness is exposed by who benefits. The only households that can claim the deduction are those that itemize expenses, and they are predominantly in higher income tax brackets. This cohort generally doesn’t need to rely on the deduction to buy a home and service the mortgage, so it only serves to push up the amount of debt they can take on and, as a result, home prices at the middle and top ends of the market.”
Edwards believes it is at least likely that “doing away with the mortgage interest deduction is an actionable policy the federal government can take” to improve home affordability. This is highly doubtful, as the policy has a negligible effect overall, and housing prices are being driven by increased demand without a corresponding increase in supply. Indeed, cutting the total savings to taxpayers from the mortgage interest deduction in half after the 2017 tax cut certainly didn’t slow real estate price appreciation in the slightest.
Correspondingly, it’s quite clear that there isn’t much, if any, economic benefit to having the mortgage tax deduction. As a subsidy for homeownership, it doesn’t make a lot of sense, given it generally benefits wealthier people who generally don’t have a problem buying a home in the first place. In short, helping affluent people who should be buying homes worth $650,000 to instead buy homes worth $700,000 should not be a pressing government concern.
And as a stimulus to the housing market, it’s also completely unnecessary, as housing is almost as expensive as it has ever been. If anything, we have the opposite problem.
Studies tend to show very small and generally negative effects. A study by the nonpartisan Tax Policy Center found that the 2017 changes to the mortgage interest deduction had a very minimal effect that was completely offset by the same law’s tax reduction.
Another study from Denmark found that “the mortgage deduction has a precisely estimated zero effect on homeownership for high– and middle-income households.” An international survey found that “the empirical evidence suggests that, contrary to popular wisdom, the [mortgage interest deduction] generally does not increase the ownership rate.”
If anything, removing the mortgage interest deduction would likely have a slightly positive effect. A study in the American Economic Review found that “eliminating the mortgage interest deduction causes house prices to decline, increases homeownership, decreases mortgage debt, and improves welfare.”
But as the charts in the study show, the effects, while significant, are tiny.
Kamila Sommer and Paul Sullivan, “Implications of US Tax Policy for House Prices, Rents, and Homeownership,” American Economics Review, Pg. 265
What About Real Estate Investors?
Some might be concerned that removing the mortgage interest deduction would severely affect real estate investors. After all, the tax advantages of owning real estate are one of the biggest boons to property ownership there is. Fortunately, this is not an issue with real estate investments.
As the IRS website states, “You can deduct the ordinary and necessary expenses for managing, conserving and maintaining your rental property… Necessary expenses are those that are deemed appropriate, such as interest, taxes, advertising, maintenance, utilities and insurance.”
There’s no $750,000 limit, either. As the National Association of Realtors points out, “[U]nlike those who itemize mortgage interest deductions, rental property owners are not subject to a limit on the amount of the debt.”
And why should there be? Real estate investment is a business, and every other business is allowed to deduct their business interest expense from their taxable income (with some exceptions). It would be completely unfair to single out real estate investment as an exception.
Final Thoughts
Indeed, that is probably the best case to make for why a mortgage interest deduction for homeowners should stay on the books: Why should real estate investors benefit from a tax deduction that homeowners do not?
For this reason and the (very) marginal boon it grants to the housing market, the National Association of Realtors has “strongly opposed” any attempt to reduce or eliminate it.
But as noted, the cost to the real estate market would be tiny if it were to go. Furthermore, the homeowners who tended to be affected would be the wealthier among us, and even for them, only to a slight degree.
If we want to subsidize homeownership, tax credits for lower-income people would make far more sense. The mortgage interest deduction has proven to be an ineffective and mostly irrelevant tool to aid the housing market. For most of us, it would not be missed.
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Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.
