Pro Mortgage Interest

Tax Deduction
Ashley Sadighpour, Charlene Shi, Jeremy
Sauvage, Nick Segal, & Matt Wagonhurst
Mortgage Interest Tax Deduction

● Allows taxpayers who own their homes to reduce their taxable income
● Completed through a Schedule A Form 1040 after itemizing all relevant
mortgage interests expenses (including property taxes and medical
expenses) and confirming mortgage is a secured debt
● Only 54% of homeowners receive tax benefit from mortgage interest
● Deduction is not a tax credit-- do not receive dollar for dollar tax reduction
on the actual taxes owed.
● Value of Mortgage Interest Tax Deduction rises steadily as household
income increases, giving larger benefits to higher earners.
Several Limitations

● Taxpayer must elect to itemize deductions and total itemized deductions

must exceed the standard deduction
● Deduction is limited to interest on debts secured by a principal residence or
a second home
● Interest is deductible on only the first $1 million of debt used for acquiring,
constructing, or substantially improving the residence or the first $100,000
of home equity debt regardless of the purpose or use of the loan
Benefits of the Mortgage Interest Tax Deduction

● Provides two more methods for deducting your taxes on a home/investment

○ Interest and equity in addition to real estate tax deductions
● Allows for a greater deduction than the standard deduction amount based
on marital status
○ $5,800 for singles, $8,500 for heads of households, $11,600 for married couples
● Economic stimulus and Time Value of Money
○ Encourages homeowners to secure a mortgage to purchase a home
○ Homeowners will have more money to spend (and return to the market)
○ Homeowners will have more money to invest in other asset markets
Example

Bob (single, 28% income tax bracket)

● Purchases a home for $600,000

○ Down payment of 20%: $120,000
○ Mortgage of $480,000
○ Interest rate: 4%
○ Amortized over 25 years
○ Monthly payment: $2,547
■ Principal: $734
■ Interest: $1558 → over 12 months = $18,696 x 28% = 5,235
■ Property Taxes: $255 → over 12 months = $3,060 x 28% = $857
○ Total savings of 6,092 (compared to 5,800 for standard deduction)

Source: Ready for Zero

Arguments Against Con

● Only favors high income earners; middle & lower class do not benefit
○ Hudson institute study: >50% of deduction claimed by households with income $75,000 -
$200,000; 22% incomes $50,000- $75,000. Top 5% of taxpayers account for <5% of
deduction

Source: National Association of Home Builders

 Arguments Against Con
● Deduction artificially inflates home prices
○ At same time, eliminating/reducing deduction would cause home prices to fall, hurting existing
homeowners
○ Studies show that eliminating deduction will reduce demand for housing by raising tax on
prospective home buyers
● Subsidizes the real estate industry
○ National Association of Realtors report noted that homeownership has significant positive
correlation with community involvement, neighborhood stability, children educational success,
physical & psychological health
● Contributes to the budget deficit
○ Housing contributed 17-19% on avg to GDP in past four years
● Doesn’t actually boost homeownership rates
○ A study conducted by John W. Diamond and and george R. Zodrow shows that in the long-run,
the elimination of the MID would decrease the investment in owner-occupied housing rate by
Bibliography
http://www.nytimes.com/2006/03/05/magazine/305deduction.1.html?pagewanted=print&_r=0

http://taxfoundation.org/article/who-benefits-home-mortgage-interest-deduction

http://www.investopedia.com/articles/mortgages-real-estate/11/calculate-the-mortgage-interest-math.asp

http://realtormag.realtor.org/news-and-commentary/commentary/article/2013/05/not-high-wire-act

http://www.nationalaffairs.com/publications/detail/rethinking-tax-benefits-for-home-owners

http://fourtheconomy.com/debating-the-mortgage-interest-deduction/

http://www.nahb.org/en/research/housing-economics/special-studies/mortgage-interest-and-real-estate-tax-deductions-policy-issues-
2008.aspx

http://blog.readyforzero.com/mortgage-interest-tax-deductions/#.Vj-8eIQuq9k

http://bakerinstitute.org/files/812/