Question: In recent articles about the current annual $1 trillion deficit of the federal government, one of the ways discussed to reduce this annual deficit is to eliminate or limit the mortgage-interest deduction for homes. This deduction costs up to $100 billion per year. Why is there a mortgage-interest deduction for homes when there is no such deduction for office buildings?
Answer: The mortgage-interest deduction allows homeowners to deduct the mortgage interest on not only their primary home but also on a second home.
This mortgage-interest deduction applies to both federal tax liability and state tax liability. A homeowner also has a tax deduction for real property taxes. The bottom line is that for taxpayers in higher tax brackets, up to 50 percent of a monthly mortgage payment on a home can be tax-deductible.
In addition, in 1997 Congress eliminated the mandatory roll-over rules when a home was sold and enacted a law exempting any gain on the sale of a home up to $250,000 for a single taxpayer or $500,000 for married taxpayers. This exemption could be taken every two years. Many families began at least part-time employment as “house flippers.” In other words, a family would buy a home which needed some work, fix up the home, live in the home for two years and sell it. In the booming home market until 2006, the gain on the sale could be significant. This tax-free gain on the sale of the home would be a major source of the family’s income. The family would then buy another home and start all over.
Many commentators believe that this 1997 legislation was the beginning of the “real estate bubble,” as homeownership became so financially attractive. The goal of all of these pro-homeownership tax breaks was to increase the number of homeowners and let families realize the “American Dream.”
Other countries such as Canada, however, do not have all of these tax breaks, and have a strong home market. Canada has the same percentage of homeowners as the U.S. and has higher home prices.