Do it for the Taxes: The Mortgage Interest Deduction
When the subject of the debate you are having is centered on the advantages or disadvantages of buying a home versus renting, inevitably the topic of taxes comes up. And with good reason: There are more tax benefits for owning a home than there are for renting the roof over your head. But are the tax savings worth it? Better yet, why do you get a tax deduction at all? Even more curious, why?
We’ll discuss the nature of this deduction and benefits and downsides of this unusual tax provision in several posts. But first, how about a brief history of what made owning a home the most desired decision you might ever make.
The American Dream
Back in the late eighties, a commercial was aired, somber in tone and foreshadowing the end of an era. It was sponsored by the National Association of Realtors (NAR) and used these apocalyptic words, “Don’t let Congress eliminate the mortgage interest deduction. Keep the American dream alive.” The question was: Whose dream? The Tax Reform Act of 1986 virtually eliminated the Mortgage Interest Deduction (MID) for families earning less than $40,000 a year. This amounted to about 30% of the population. Because MID was dependent on tax rates, and that Act lowered taxes to the point where this benefit became a mote point, one-third of America would see no benefit.
What is Sacrosanct?
Economists didn’t like the MID. They believed that it stymied investments in stocks while serving to do little more than inflate the price of homes. They were more or less right on both points. But even though tax rates were lowered over time, the MID remained a strictly hand’s off part of the tax code. Ronald Reagan even instructed his Treasury Department “to preserve that part of the American Dream.” Ironically, MID was never mentioned when it was first introduced in the Revenue Act of 1913. The only reference was to a deduction of interest in a given year by taxable person with indebtedness. There was no reason given or even no logical reasoning why it was even added to the first tax law and yet it remained.
When Taxes Motivates
Prior to WWII, less than half of the population owned property. At the time, Congress had no reason to have this sort of deduction on the books. It would be another decade or so before Congress realized that taxes, or relief from taxes such as deductions were actually good motivators, or s they thought. It became, as Dennis Ventry of the University of Southern California, Berkley called an “accident to birthright” type of deduction.
And yet, it was not taxes that caused homeownership to rise in the post WWII era. Looser credit as well as the availability of long term loans accompanied by low down payments that created the perfect situation for a country that was experiencing higher incomes and changing demographics.
Despite the inequities and the high cost of this tax, it remains in place and seems to have the staying power to do so for quite some time. Yes, you can deduct many more things from your gross income if you own a home but the economic sense of buying one to save on taxes is not a reality. The own v. rent argument is nuanced but there are significant pluses to ownership that go well beyond the tax deductions.
How can we assist you today?
On behalf of The Jones Group @ Sunriver Realty
Nola Horton-Jones, Principal Broker/Realtor | ABR, C-RIS, e-PRO, GREEN, RSPS, CCIM Candidate
Bryce Jones, Principal Broker/Realtor | ABR, CRS, e-PRO, GREEN, GRI, RSPS, SFR
The Jones Group @ Sunriver Realty | 57057 Beaver Drive | Sunriver, OR 97707
N Mobile: 541-420- 3725 | B Mobile: 541-420- 4018 | Fax: 541-593- 5123
Licensed in Oregon