Tax Policy and Housing

March 12, 2014

Tax policy plays a key role in shaping housing demand, determining business conditions and deterring or fostering economic growth. Housing-related tax policy is of such significant importance that it has been selected as a primary issue for NAHB’s 2014 legislative conference, “Bringing Housing Home,” which takes place March 17-21 as home builders and other members of the residential construction industry meet federal lawmakers. As part of this event, yesterday we examined labor issues and tomorrow we will look at the future of the housing finance system.

The mortgage interest deduction (MID) is a cornerstone of housing tax policy. Deductions for mortgage interest have been permitted since the establishment of the income tax in 1913. Broadly claimed, the deduction facilitates homeownership by reducing the after-tax of purchasing a home with a mortgage. The MID also creates parity with other forms of investment for which interest expense is deductible.

MID_200K (2)

According to 2012 data from Congress:

  • The MID benefitted 34.1 million homeowning households for a total savings of $68.2 billion in that year alone
  • Two-thirds of the tax benefit was collected by households earning less than $200,000 in economic income
  • For households earning between $100,000 and $200,000 (e.g. married couple each earning $55,000), the average tax savings was more than $2,000 for just a single year

Historically more than 85% of mortgage interest paid is claimed as a deduction on Schedule A. That is, most people paying a mortgage are in fact itemizing taxpayers. And the largest benefits as a share of household income, are typically for younger households, who are paying mostly interest in the early years of a mortgage.

The rules for second homes are also critically important for homeowners who change principal residences within a tax year, traditional seasonal residence markets, and custom home construction in which the eventual homeowner takes out a construction loan. This broad use of the second home MID rules is illustrated by examining the geographic distribution of the second home housing stock.


Public opinion polling consistently reports that homeowners and renters – prospective homebuyers – favor retaining present law rules concerning the MID and defending our nation’s commitment to homeownership. For example, a 2013 United Technologies/National Journal Congressional Connection Poll asked respondents to rate the importance of various tax rules. The results indicated that 61% of respondents said that it was ”very important” to keep the MID, with 86% of individuals saying it was either “very important” or “important.” This placed the MID second in their list, falling behind only tax preferred retirement accounts, such as 401(k)s, which scored a 63% “very important” ranking.

Recent economic research has linked the use of the MID with intergenerational income mobility. And macroeconomic modeling by the Tax Foundation found that repealing the MID to lower-income tax rates would reduce GDP growth.

Another important tax program on the rental housing side of the industry is the affordable housing credit or LIHTC. Created as part of the last major tax reform effort in 1986, the Low-Income Housing Tax Credit (LIHTC) replaced previous policies with a successful private-public partnership that ensures the development of housing for low- and moderate-income Americans. Since its inception, the program has financed the construction of more than 2.5 million affordable homes.

The LIHTC allows equity investments to be raised at lower cost, which makes the production of affordable housing possible. The LIHTC sustains 95,000 new full time jobs per year across all U.S. industries—generating $2 billion in federal tax revenue. No other housing program has been as successful as the LIHTC in producing safe, high quality, affordable rental housing. While the program has been producing approximately 75,000 new homes a year, the need for affordable housing remains strong given rent burden levels across the nation.

Rent Burden

For these reasons noted above, the future of the MID, the LIHTC, and other housing related tax provisions should be watched carefully in any future tax reform effort. A recent discussion draft of a comprehensive tax reform proposal from House Ways and Means Chairman Dave Camp would, for example, make significant changes to these and other tax rules.

State-Level Mortgage Interest Deduction Statistics

March 22, 2013

The tax benefits of the mortgage interest deduction (MID)  are primarily targeted to the middle class. According to 2012 Congressional estimates, 65.4% of the tax benefit is collected by households who have economic income* of less than $200,000. 

Of course, the claims for the MID are going to vary state-to-state given differences in house prices and other costs of living, household incomes, and tax items such as property taxes or state income/sales taxes, which in part determine whether a homeowner claims the standard deduction.

Fortunately, the Internal Revenue Service publishes state-level data of tax statistics. And these state level data, for which the income classifier is equal to adjusted gross income (AGI), illustrate the degree to which MID-benefiting taxpayers are concentrated in the middle class.

MID_200K (2)

The map above reports the share of taxpayers who claimed the MID on 2010 federal income tax return (the most recent data available) and who also report less than $200,000 in adjusted gross income. Not surprisingly, the share tends to drop somewhat in high cost states, such as New York and California, for which household incomes tend to be higher.  Nationally for 2010, 91% of taxpayers claiming the MID has an AGI of less than $200,000.

Of course, income, homeownership status, and tax characteristics are not fixed across one’s life-cycle. For example, interest payments for a fixed rate mortgage are larger in the early years of a mortgage, thus the potential deduction amount for the MID is higher for recent homebuyers.

As a result of this life-cycle effect, many homeowners benefit from the MID for a series of years and then cease claiming the deduction as their interest payments fall and the standard deduction becomes a better deal. For this reason, the often cited statistic that only a quarter of taxpayers benefit from the MID is misleading.  In fact, this claim should be qualified as “in a given year,” given the life-cycle impact.

By merging IRS data with Census American Community Survey data (both for 2010), we can estimate the more useful statistic of how many homeowners with a mortgage benefit from the MID in a given year. Nationally, 73% of homeowners with a mortgage claimed the MID on their income tax returns for tax year 2010

It is important to note that this number is not an accounting of the percentage of homeowners who benefit from the MID during their tenure of homeowners. That percentage would be higher given life-cycle effects, but cannot be estimated without panel data of income tax returns.

* Economic income is equal to adjusted gross income plus certain items that people do not normally count as income, such as employer paid health insurance or employer paid payroll tax. So, for most households their applicable economic income is higher than they would imagine given their knowledge of gross income or adjusted gross income from their tax returns.

How Homeowners’ Tax Rates Could Go Down, but Their Tax Bills Go Up

September 25, 2012

NAHB has published a new paper analyzing the mortgage interest deduction (MID). The MID has been in the news a lot recently, as the talk heats up of possible tax hikes in 2013 .

The new research adds to NAHB’s existing tax policy analysis by providing a means to examine the possible impacts of future comprehensive tax reform proposals. Analysis of “winners” and “losers” of tax reform requires data on an individual’s complete set of tax characteristics. In this vein, using IRS data we estimated tax profiles of typical MID beneficiaries (single, married, married filing separately, and head of household). These profiles provide average values of other major tax values, such as deductions and credits, for taxpayers benefitting from the MID.

The ability to create data-based examples  of taxpayers will offer an advocacy tool for NAHB in the 2013 tax policy debates. The data in this paper will allow us to examine any tax reform proposal with a focus on impacts on homeowners. Because most analysis of tax proposals focuses on various income classes (despite the fact that there can be winners and losers within those classes), the ability to focus on homeowners in particular will offer a different perspective.

As an example of the tax profile analysis, the paper reports that the typical single MID tax beneficiary claims a little more than $7,000 for the MID, more than $2,100 for real estate taxes paid, more than $1,900 in state income/sales taxes, and more than $600 in charitable giving deductions.

Knowing this information will allow NAHB to examine whether typical MID taxpayers are better or worse off under tax reform proposals, many of which lower statutory rates by weakening or eliminating credits or deductions. While these proposals may lower a taxpayer’s marginal tax rate, the effective tax rate (taxes paid divided by taxable income) may rise along with a taxpayer’s final tax bill. In fact, under most of these tax reform proposals debated in the last few years, homeowners would likely pay more in taxes due to scaled back deductions for housing. For this reason, the paper demonstrates that lowering tax rates in tax reform does not necessarily imply lower taxes, but rather a shifting of who pays taxes and how.

For example, suppose a tax reform proposal that cuts all itemized deductions, the standard deduction, and the personal exemptions by 75%. Further suppose the present law tax rates are replaced with a two-bracket system in which a 10% rate is applied against the first $50,000 (for married taxpayers) and a 20% rate is applied against all income above that threshold.

In the paper, we show how a typical married homeowner who benefits from the MID would have their marginal tax rate fall from 25% to 20%, but their taxable income would rise, increasing the effective tax rate from 9.93% to 13.29%, leading to a tax hike of $3,164 or nearly 34%. This hypothetical proposal is a good example of how marginal rates can fall, but taxes go up.

To illustrate how various tax items are connected, the paper walks through another example involving the housing tax deductions and the charitable giving deduction. In this case, the MID and the real estate tax deduction are hypothetically repealed. The result is a more than 23% cut for the tax benefits for the charitable deduction, despite the fact that the rules for that deduction are left unchanged. This occurs because without the housing deductions, large numbers of homeowning middle class taxpayers cease to itemize, thereby losing their charitable deduction.

The impacts of tax policy on housing can be large. Raising taxes on homebuyers means weakening housing demand, which in turn would reduce housing prices and homeowner wealth. The paper explains that at today’s valuations each additional percentage point decline in housing prices would reduce household net worth by about $160 billion. At these levels, it would take only a little more than a six percent house price decline to reduce household balance sheets by $1 trillion. With some estimates of the effect of eliminating the MID running as higher as 15%, the macroeconomic effect of any cuts to the MID are sizable, for homeowners, housing stakeholders, and the economy at large.

Tax Week: The Mortgage Interest Deduction

April 16, 2012

As tax filing season comes to a close, now is a good time to take a look at some of the basic facts concerning the mortgage interest deduction (MID). As homeowners past and present know, the MID is a cornerstone of American tax and housing policy. Broadly claimed, the deduction facilitates homeownership.  A few facts about the MID from 2010 data:

  • The MID benefitted 33.7 million homeowning households for a total savings of $82.7 billion
  • Two-thirds of the tax benefit was collected by households earning less than $200,000 in economic income
    • Household income is the sum of all income earned by individuals filing on the same tax form (e.g. two married adults); economic income includes items like employer-paid payroll tax and health insurance
  • For households earning between $100,000 and $200,000, the average tax savings was more than $2,500

In past analysis, NAHB has demonstrated that historically more than 85% of mortgage interest paid is claimed as a deduction on Schedule A. That is, most people paying a mortgage are in fact itemizing taxpayers.

And the largest benefits as a share of household income, are typically for younger households, who are paying mostly interest in the early years of a mortgage.

Despite some proposals to curtail or the eliminate the MID, in the U.S. Congress, House Resolution 25 expresses support for the present law rules for the MID. As of April 16th, the resolution has 193 cosponsors.


Who Lives in New Housing?

April 12, 2012

April is New Homes Month, so we thought we would take a look at the demographic data from the most recent edition of the American Housing Survey (AHS) to see who lives in newly constructed homes. The AHS defines new construction as housing units no more than four years of age.

Typically, larger households are relatively more likely to live in new homes. This is a finding that complements previous NAHB analysis that examined home size and geography.

The graph above reports the percentages of various types of housing (owner-occupied, renter-occupied and newly constructed, both owner and rental) with respect to the number of people who reside in each. For example, the first blue bar shows that about 22% of owner-occupied homes contain one person, while thse second blue bar notes that 36% of owner-occupied homes contain two people.

It is clear that renters are most likely to be one person households. Similarly, two-person households are the most common type for homeowners. The two-person household is also the most common form for new construction, with 33% of newly constructed homes holding two-person households. 

On a relative basis, a greater share of new construction houses three persons or more compared to homes of  homeowners or renters. This can be seen by noting that the green bars in the chart above are higher than the blue and red bars for households with 3 or more people. In fact, 47% of all new construction houses three or more people.


The short answer is that new construction is more likely to house children than other types of housing on a unit-by-unit basis. As can be seen on the graph above, new construction has the largest shares of homes for all counts of children.  Specifically, 44% of newly constructed units house children. Only 35% of rental units and 34% of owner-occupied units house children.

And this in turn helps explain the age distribution of people who live in new homes. The AHS data indicate large relative shares for new housing with respect to households headed by people aged 30 to 44. And it is worth noting, this is the age segment for whom, as a share of household income, the mortgage interest deduction offers the largest benefits. It is also prime parenting years. Renting households tend to be younger and owner-occupiers as a class tend to be older.

Overall, 78% of heads of households who live in new construction are aged 54 or younger, compared to 56% for all owner-occupied housing. However, these statistics may change in the coming years as more 50+ new housing construction gains strength.

Where are the Nation’s Second Homes?

August 24, 2011

Second home ownership is often discussed in housing policy debates, but in general there is a poor understanding of what is considered a second home and where these homes are located. This is particularly true in tax policy contexts because the most common stereotype of a “second” home – an expensive beach house – is often a rental property that is not eligible for the mortgage interest deduction.

The following analysis sheds some light on the location and count of second homes that are in fact eligible for the second home portion of the mortgage interest deduction. The findings indicate that the geography of second home ownership is much more expansive than simply beachfront locations.

Accurately accounting for the stock of second homes is difficult, in part because what constitutes a second home differs depending on what definition is used. For the purposes of the mortgage interest deduction (MID), a second home is, in general, a non-rental residence that is not the taxpayer’s primary residence. This could be: (1) a home that used to be a primary residence due to a move or a period of simultaneous ownership of two homes due to a move; (2) a home under construction for which the eventual homeowner acts as the builder and obtains a construction loan (Treasury regulations permit up to 24 months of interest deductibility for such construction loans); or (3) a non-rental seasonal or vacation residence.

Given this tax-based definition and using data from the 2009 American Community Survey (the most recent available), a mapping of the share of each county’s housing stock that consists of second homes is generated.  However, the analysis excludes the stock of homes under construction (#2 above) because county level data are not available.

Overall, there are 6.9 million housing units that qualify as second homes or more than 5% of all housing units in the nation.

907 counties in the U.S., or about 28% of the total, had at least 10% of the local housing stock consist of second homes, with at least one such county in 49 states (Connecticut and DC are outliers).

339 counties, or more than 10% of the total, had at least 20% of the local housing stock due to second homes.

And there are 26 counties where at least half of the local housing stock was made up of second homes. Of these counties, six were in Michigan, five in Colorado, and two each in Pennsylvania, Utah, Massachusetts, and California. One such county was located in New York, Alaska, Idaho, Missouri, Wisconsin, Texas and New Jersey.

Of course, large overall county stocks of second homes are located in areas with larger totals of population and housing, meaning large metropolitan areas. Keeping this in mind, on a pure count basis, the following states possessed at least one county with at least 25,000 second homes: Florida, California, New Jersey, New York, Texas, Delaware, Michigan, South Carolina, Nevada, Massachusetts, Illinois, and Arizona.

These findings suggest caution regarding proposals that would affect second home ownership because the reasons for owning a second home are more diverse than critics usually provide. And as the maps above indicate, and given the economic benefits of housing, there are many locations in the country where second homes constitute a significant portion of the total housing stock.