Proponents of the mortgage interest tax deduction (MID) applaud the subsidy as a necessary tool to encourage homeownership and help low- to middle-class homebuyers. To many in the real estate industry, it is unimpeachable.
However, in practice, the MID disproportionately benefits high-income homeowners, not the majority of low- and middle-income buyers — and ultimately passes those benefits on to homebuilders, sellers and lenders. Further, the MID contributes to income and racial inequality, according to a recent report by Trulia.
Based on data released by the Internal Revenue Service (IRS) and U.S. Census Bureau (Census), the Trulia report found only 12% of tax filers with an adjusted gross income (AGI) of less than $50,000 itemize their deductions and benefit from the MID. Meanwhile, a whopping 94% of those with AGIs of $200,000 or more claim the MID.
Additionally, minority heads of households are about 63% less likely to claim the deduction than Caucasian heads of households. Men are 31% more likely to claim it than women.
The report offers an explanation for these gaps: compared to Caucasian men, racial minorities and women historically have lower incomes, making them less likely to obtain a mortgage and therefore less likely to claim the MID.
However, even after controlling for income and age, minority heads of households are still between approximately 39% and 58% less likely to have a mortgage and claim the MID than Caucasian heads of households, with some regional exceptions.
Further, while accounting for age and income minimized the gender gap, women remained about 11% less likely than men to hold a mortgage and claim the MID. This disparity is largely attributable to the fact that female heads of households are frequently single and have a smaller income. Additionally, a larger percentage of single women — about 37% — support dependent children than single men — 12% — making homeownership more difficult to achieve financially.
The report ultimately concludes:
- women and minorities experience barriers to homeownership that prevent their use of the MID, such as a higher likelihood of supporting dependents (for women) and a lack of intergenerational wealth transfers (for minorities); and therefore
- the MID is fueling inequality by disproportionately subsidizing homeowners who are wealthier and Caucasian.
The MID’s long history of inequality
Disparate impact from the MID is hardly news to astute participants in the real estate industry. Critics of the MID have frequently pointed to data showing it primarily favors the top 20% of income earners in the U.S., providing them greater benefits than the poorest mortgaged homeowners who are in need of subsidies the most.
To recap, the MID is a tax deduction on interest accrued and paid on mortgages for a primary or second home. Homeowners can only claim it as an itemized deduction on their income tax returns.
However, to benefit from claiming the MID as an itemized deduction, a homeowner’s income and total deductions need to be high enough to outweigh the benefits of claiming a standard deduction. This tax filing route is typically used by those with higher incomes, and more assets and expenditures.
Thus, the size of the subsidy is tied directly to the amount of the mortgage, which corresponds to the home’s value and the owner’s supporting income. The basic rule here is: the wealthier the homeowner, the more home they purchase, the bigger the tax savings — and in light of the latest demographic data analyzed by Trulia, even race and gender factor into this tax disparity.
The MID’s true beneficiaries
Not only does the MID disproportionately favor high-income homeowners, its primary beneficiaries are not these homeowners who claim the deduction at all, but homebuilders, sellers and lenders — the reason builders’ associations and real estate trade union members are the most vocal advocates for the MID.
How do these groups stand to gain from the MID? The answer lies in what the MID does in application. While the MID acts as a “tax savings” for the wealthy, it simultaneously demands the lost revenue be replaced and reaped from someone else: homebuyers. The MID inflates home prices, baiting buyers to overextend their finances with the promise of a partial rebate of their monthly payments — which most never claim.
This is advantageous for sellers and mortgage lenders who benefit from inflated mortgage amounts and increased buyer leveraging.
Homebuilders also have good reason to advocate for the deduction since their profits depend on the MID remaining in place to artificially increase home prices.
Thus, the MID ultimately redistributes personal wealth via mortgaged homeownership. Homebuyers pay for the resulting price inflation through the purchase price of the home, the profits of which go directly to builders, sellers and lenders.
Of course, in theory, some buyers are reimbursed through the MID. However, the fact that this depends on the buyer having the financial wherewithal and incentives to itemize their deductions means most low- to middle-income homebuyers never receive the subsidy.
The need for MID reform
As research continues to reveal the MID’s minimal benefit to the majority of homeowners, proponents of the MID need to admit the MID is not accomplishing what it claims to.
While proponents argue the MID indirectly promotes homeownership among low- and middle-class income buyers, what the MID principally does is:
- subsidize the wealthiest taxpayers who already have the income to sustain homeownership; and
- increase profits for homebuilders, sellers and lenders.
However, rabid support of the MID means it is unlikely to be entirely eliminated from the tax code. What is needed — and what is politically possible to accomplish — is reform of the MID to redirect the benefit from the wealthy to mid- and low-income homeowners, the intended beneficiaries of these programs. For instance, the tax deduction could be limited to principal residences only, not second homes which are generally owned by the wealthiest among us.
Until reforms are made to the MID, low- and mid-income homebuyers will continue to receive the short end of the stick — while other participants in the industry reap all the benefits.