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.

Analyzing Claims Regarding the Mortgage Interest Deduction

July 25, 2013

As the Senate examines existing tax policies as part of its “blank slate” approach to tax reform, and as the House Ways and Means Committee continues its review of the tax code, it is appropriate to keep in mind the importance of the mortgage interest deduction (MID) as a middle-class tax provision that makes it possible for many families to achieve homeownership. It is also useful to review some of the claims against the MID to determine if those claims are valid. Over the past few years, using data from the IRS and the Census Bureau as well as estimates from other sources, we have assessed the validity of these claims. This information also formed the basis of NAHB testimony on housing tax policy before the Senate Finance Committee in October 2011 and the House Ways and Means Committee in April 2013.

Claim #1: The wealthy get most of the benefit from the mortgage interest deduction.

Fact: The majority of the tax benefits from the MID go to middle-class households. Data from the Congressional Joint Committee on Taxation shows that 86 percent of households who benefit from the mortgage interest deduction have incomes of less than $200,000. It is also useful to keep in mind that the majority of home owning households are married couples, so the household income measure will often include two incomes.

Claim #2: Repealing the mortgage interest deduction would not damage the economy or individual households.

Fact: Almost all studies examining the elimination of the mortgage interest deduction find that it would reduce demand for housing by raising taxes on prospective home buyers. This reduction in housing demand would also lower home values for existing home owners who would experience a significant loss in wealth.

A 1 percent decline in home prices would result in a loss of $185 billion to American households. Just a 6 percent decline would eliminate $1 trillion in household net worth. If repealing the deduction lowered prices by 10 percent or more, Americans would lose trillions of dollars in household net worth.  If home values fall, then more families will find themselves under water, in default and in foreclosure. Eliminating the mortgage interest deduction would reduce the financial resources families can draw on for education, entrepreneurship and retirement. And if home values fall, then state and local tax revenues fall, making it harder to fund schools, infrastructure, public safety and other important government functions. Repealing the MID would have serious economic consequences.

Claim #3: Only a small percentage of home owners claim the mortgage interest deduction.

Fact: The mortgage interest deduction is broadly claimed. Seventy percent of home owners with a mortgage claim the MID in a given year, and almost all home owners benefit from the deduction at some point during their homeownership lifecycle.

The argument that only an estimated “quarter of taxpayers” claim the deduction is misleading because it ignores the lifecycle element of homeownership. Of the two-thirds of households who are home owners, one-third own free-and-clear with no mortgage. And of those with a mortgage who claim the standard deduction in lieu of the MID, many are in the final years of a mortgage and are paying small amounts of interest and greater amounts of principal. In the early years of their mortgage when much greater amounts went to interest, those home owners very likely claimed the mortgage interest deduction.

Claim #4: Repealing the mortgage interest deduction would make the tax code more progressive.

Fact: A progressive tax system is one in which taxpayers with lower incomes pay a smaller share of their earnings in taxes than higher income households. Repealing the mortgage interest deduction would result in larger tax hikes – as a share of household income – for the middle class. For example, for households with less than $200,000 in adjusted gross income (AGI), the typical mortgage interest deduction is worth 1.76 percent of that family’s AGI. For taxpayers reporting more than $200,000 in income, the benefit falls to 1.5 percent of AGI. Thus, in the event of repeal, middle-class home owners face a larger tax hike as a share of their income, making the tax system less progressive.

Claim #5: The mortgage interest deduction incentivizes buyers to purchase a larger home.

Fact: While the mortgage interest deduction is sometimes connected with larger homes, evidence shows that it is more often the case that the tax benefit reflects family size and underlying housing demand. Larger families require larger homes, which in turn means a greater amount of mortgage interest paid and a larger tax benefit. And NAHB analysis of IRS data confirms this. Taxpayers with two personal exemptions (a measure of family size) who claimed the MID had an average tax benefit of $1,500. Taxpayers with four personal exemptions had an average benefit of approximately $1,950. In fact, the benefit increased correspondingly from one personal exemption to five-plus personal exemptions, which is consistent with the notion that larger families require larger homes.

Claim #6: Renters do not support the mortgage interest deduction.

Fact: Public opinion polling has generally found the MID to be popular with renters, most of whom hope to become home owners. Given that recent home buyers receive the greatest tax benefits from the deduction, such renters would have much to lose in case of repeal. A 2012 poll found that a majority of renters were opposed to eliminating the mortgage interest deduction.

Claim #7: Because mortgages on second homes also qualify for the mortgage interest deduction, taxpayers are subsidizing vacation homes for the wealthy.

Fact: The rules relating to second homes are complicated, and often apply to situations that do not involve a vacation home.  The rule allows owners who sell their home and buy another – those who own more than one primary residence in a tax year – to claim the MID for both homes on their annual tax return. The rules also allow home owners who are building a new home to claim construction loan interest as a deduction.

And the rules support investment in seasonal residences that provide an economic foundation for many parts of the country. In fact, 49 states in the U.S. have at least one county where more than 10 percent of the housing stock fits the tax definition of a second home. But we are not talking about million-dollar homes on the beach, which are usually paid for in cash or claimed as rental property. According to an analysis of the Consumer Expenditure Survey, the average income of a household with a mortgage on a second home is $71,344.

Claim #8: While the mortgage interest deduction supports homeownership, federal policy neglects renters.

Fact: Housing policy support, in dollar terms, is roughly proportional to the total population living in renter- and owner-occupied homes. For example, the report of the Housing Commission of the Bipartisan Policy Center, which looked at all of the tax and spending programs for rentership and homeownership, found that about one-third of housing policy spending is attributable to rental housing, which is equal to the share of the population living in that form of housing. Such analysis is important because it shines a spotlight on important housing programs for affordable rental housing, including the Low-Income Housing Tax Credit (LIHTC).

Claim #9: Since not all home owners itemize, a credit would be better for the market.

Fact: Identifying winners and losers from moving from an itemized deduction to a credit depends on a number of factors, most importantly the tax credit rate. For example, the Simpson-Bowles report recommended a 12 percent tax credit, meaning a tax benefit of 12 cents for every dollar of qualified mortgage interest paid. A revenue-neutral tax credit would be approximately 20 percent. Thus, such a low rate as 12 percent would represent a significant tax hike for home owners. Moreover, it is important to remember that under most MID tax credit proposals, the property tax deduction (worth on average about one-third of the value of the MID) would cease to exist, further increasing the tax burden on home owners.

Claim #10: There is too much policy support for housing.

Fact: At the federal level, much of the focus on housing tax policy is centered on important and long-standing policies like the MID and the LIHTC, but this focus ignores the fact that home owners pay property taxes that are not collected on other forms of investment. For example, owners of owner-occupied and rental housing pay approximately $300 billion a year in property taxes to local and state governments. Such tax burdens should not be ignored in federal tax debates when considering the overall effective tax rate on housing.

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.