Saturday, March 11, 2017

10 Facts about the Mortgage Interest Deduction and its benefit to homeowners

Every April 15, as Americans file their personal income tax returns, they breathe a collective sigh of relief after deducting the interest they paid on their mortgage. In fact, the Mortgage Interest Deduction – or MID – is one of the biggest federal government distributions, saving homeowners more than $100 billion each year.

Here are 10 interesting facts and statistics about the MID and its benefit to homeowners:

1. Only mortgages for a primary residence and non-rental vacation home qualify for the MID, but not income-producing or rental properties. Homeowners can deduct interest from up to $1 million of mortgage purchase debt and up to $100,000 of home equity loan!

2. Since it’s inception, the Mortgage Interest Deduction (MID) has been one of the most popular and protected pieces of legislation. The MID has survived every round of tax cuts over the last decades, with strong lobby groups like the National Association of Realtors leading the charge to maintain the status quo. Thanks to its popularity with voters, few politicians have called for the MID's demise, though a few have been outspoken about reform.

In fact, 71% of those surveyed are opposed to eliminating the mortgage interest deduction. 63% also oppose limits on mortgage interest deduction. Support is bi-partisan, as 69% of Republicans, 64% of independents, and 57% of Democrats oppose eliminating the deduction.

3. How much does the MID really save homeowners – or cost our government? According to Treasury Department estimates, the MID has saved homeowners $86 billion annually in recent years, and probably will top $100 billion this year. The savings are also far reaching. Since 2000, 86% of mortgage interest paid has been claimed as a deduction on tax returns thanks to the MID.

4. Studies indicate that the average homeowner with $54,000 in taxable income can deduct around $7,500 in mortgage interest during their first five years of owning a home. If we extend that to the first 12 years of home ownership, the average person can deduct about $17,000.

5. The first modern federal income tax in the United States was initiated in 1913. In those days, all forms of interest were deductible, since most of the population owned or worked at small farms and it was hard to differentiate personal versus business expenses. There was no big push to make mortgage interest deductible since few people had mortgages and just owned their homes outright after paying cash. Congress was likely aiming to help farmers and business owners more than homeowners since the tax excluded the first $3,000 ($4,000 for married couples) of income and at the time, less than 1% of the population earned more than that.

6. The movement to aid homeowners with mortgages was given a huge boost in the 1930s after the Great Depression. Governmental established the Federal Housing Authority (FHA), insuring 30-year loans, as well as the Federal National Mortgage Association, or Fannie Mae.

7. Mortgages became far more prevalent after WWII. As the population exploded with the Baby Boom generation, there was suddenly a huge demand for family housing in the suburbs, so the benefit of a mortgage interest tax deduction was first used to promote the idea of home ownership.

8. Although it's almost impossible to measure, there is a direct positive impact on housing prices from the MID and homeownership. Furthermore, since the federal government doesn't want to be in the business of providing housing for a large portion of our population, the MID provides incentives for people to buy their homes, saving money compared to renting.

9. Do the wealthy or middle class save more on mortgage interest deductions? There is some controversy as to whom that MID really helps. Economists call the MID a regressively distributed benefit, pointing to the fact that the MID benefits wealthy Americans more over time since the wealthier you are, the larger your mortgage amount (generally) and the higher your tax bracket, which means the total deductions are larger.

To quote from the Center on Budget and Policy Priorities:
“A banker with a $1 million mortgage paying $40,000 in interest gets a government housing subsidy of $14,000 every year; he pays 65 cents of every interest dollar on his mortgage, while the government pays the other 35 cents. On the other hand, a nurse who makes $60,000 a year and pays $10,000 a year in interest will only get a $1,500 subsidy; she’ll pay 85 cents of every interest dollar on her mortgage while the government will pay the other 15 cents.”

But other analysts like the NAHB point to the fact that the MID is actually more valuable to the middle class, or households with incomes below $200,000. "For taxpayers earning less than $200,000, it is worth 1.76% of AGI; more than $200,000, the value drops to 1.5% of AGI."

90% of homeowners who benefit from the MID make less than $200,000 in annual income. And estimates show that two-thirds of MID benefit dollars go to those making less than $200,000 a year. Studies show that the tax savings is most valuable for younger households and newer homeowners, who have limited income, small amounts of equity, and increasing expenses due to growing families. IRS data reveals that largest total deduction amounts are for those aged 35 to 45; and as a share of household income, the largest amounts are for those aged 18 to 35.

10. If the MID was cut from the tax codes, the fallout would affect tens of millions of families across the country. In fact, a Tax Policy Center study found that limiting mortgage interest deductions to a 28% maximum rate could cause metropolitan housing prices to fall by more than 10%. If the MID was revoked, the hit to consumer confidence could cause far-reaching damage to the housing market, and then the economy as a whole.


No matter if homeowners are wealthy or working class, the Mortgage Interest Deduction is the most utilized and beneficial tax break they’ll ever see.

Do you want to know the tax rules for the Mortgage Interest Deduction? Consult your CPA or tax professional, but you can also reference the IRS website:

If you have more questions about the financial benefits of owning a home, feel free to contact us.

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