The mortgage interest deduction is overrated and definitely not something worth arguing about

The National Association of Realtors agrees Paid $418 million And canceled the 6% commission to resolve the lawsuit against it, and now some parties are paying attention to it turned arrive Mortgage Interest Deduction.

given Wave of anti-real estate investor legislationIt appears that the mortgage interest deduction is the next domino to fall. But not all “falls” are created equal.fact of this matter It’s just that the mortgage interest deduction is not particularly important. The impact of removing it would be negligible and certainly wouldn’t leave real estate investors dead on a hill.

First, the mortgage interest deduction only equates to savings of approx. $30 billion one year (Down from $60 billion after the 2017 Tax Cuts and Jobs Act).This may sound like a lot, but it is important To put this into context:

So, at the end of the day, mortgage deductions are a small thing.

What is the Mortgage Interest Deduction and What Elimination Will Do

this Mortgage Interest Deduction simply Homeowners who are allowed itemized deductions can deduct interest on up to $750,000 of loan principal. (Before passage of the Tax Cuts and Jobs Act of 2017, that number was $1 million.)

this yes no actually A Very big deduct. remember, standard deduction In 2024, it’s $14,600 for single filers and $29,200 for married couples filing jointly.

Most homeowners still have mortgages That yes take away That’s before interest rates spike in mid-2022. So for For example, if someone has a $750,000 loan with 30-year amortization and an interest rate of 3%, the annual mortgage interest would be only $22,809.59, which is actually Less than the standard deduction for a joint return. But even on a $750,000 loan with 30-year amortization and an interest rate of 7%, the first-year interest payment is only $52,258.65 (and it gets less every year) thereafter).

The highest tax bracket as of this writing (37%) That will Saving amount The individual tax bill is $19,335.70, while the standard deduction for a joint return is only $10,804. This equates to a savings of $9,335.70. Not bad, but nothing to write home about.

this that’s why It’s no surprise that the mortgage interest deduction only saves $30 billion per year, or about 0.68% of federal tax revenue.

Now, If someone has multiple other deductions, such as charitable contributions or medical expenses, the total savings from the mortgage interest deduction in the example above could be $19,335.70 higher than the standard deduction. But only those who save this money are wealthy.

this yes Key Criticisms of the Mortgage Interest Deduction,Right now It amounts to a regressive tax (or tax break to be precise), i.e. key Points made by critics. Katherine Anne Edwards Tell Bloomberg:

“The weakness of the policy is exposed by the beneficiaries. The only households that can claim the deduction are those who itemize their expenses, and they mainly belong to the higher income tax brackets. This group of people generally do not need to rely on deductions to buy homes and pay off mortgages, Therefore, it will only push up the amount of debt they can bear, causing housing prices to be in the mid-to-high-end market.”

Edwards believes that “eliminating the mortgage interest deduction is a viable policy the federal government could pursue” to increase housing affordability. this It is doubtful that the overall effect of the policy is minimal, and housing prices have also exist Driven Demand increases without a corresponding increase in supply.indeedafter the 2017 tax cut, the total savings taxpayers received from the mortgage interest deduction was cut in half, which certainly didn’t slow down the rise in real estate prices. slightest.

Correspondingly, it is quite Obviously not a lot of, The financial benefits, if any, of the mortgage tax deduction.As a subsidy for home ownership it doesn’t make much sense as it generally benefits the wealthier Generally speaking There are no problems when buying a house from the beginning.In short, helping wealthy people who should buy a $650,000 home arrive Buy a $700,000 home instead should not become a pressing issue for the government.

and As a stimulus to the real estate marketand it’s completely unnecessarybecause housing is Almost as expensive as before. If anything, we face the opposite problem.

Research often shows very small Generally speaking negative Influence. a study The nonpartisan Tax Policy Center found that changes in the mortgage interest deduction in 2017 Very little impact used to be completely offset Tax reduction under the same law.

other study from denmark found that “the impact of mortgage deductions on high homeownership rates is precisely estimated to be zero”– and middle-income families. international investigation found that “empirical evidence suggests that, contrary to popular belief, [mortgage interest deduction] Generally does not increase ownership rates.

If so, delete The mortgage interest deduction may have a slightly positive impact. a study inside American Economic Review found that “eliminating the mortgage interest deduction leads to lower house prices, increases homeownership, reduces mortgage debt, and improves welfare.”

But as the graphs in the study show, the effects, while significant, were small.

Kamila Sommer and Paul Sullivan, “The Impact of U.S. Tax Policy on House Prices, Rent, and Homeownership.” American Economic Review,page number. 265

What about real estate investors?

Some may worry that eliminating the mortgage interest deduction will severely impact real estate investors. after all, Tax incentives The benefits of owning real estate are one of the biggest benefits of owning property. Fortunately, this isn’t a problem with real estate investing.

As the IRS website state“You can deduct ordinary and necessary expenses for managing, keeping and maintaining your rental property…necessary expenses are those deemed appropriate, such as interest, taxes, advertising, maintenance, utilities and Insurance.

There is also no $750,000 limit.as the national association of realtors point out“[U]Unlike those who itemize deductions for mortgage interest, rental property owners are not limited by the amount of their debt.

Why?Real estate investing is a business, so is everything else Business allowed deduct their business interest expense deducted from their taxable income (with some exceptions). It would be completely unfair to single out real estate investment as an exception.

final thoughts

Indeed, that is perhaps best case scenario make Why homeowners’ mortgage interest deductions should stay on the books: Why should real estate investors benefit from tax breaks that homeowners don’t get?

For this reason and the (very) marginal benefits it brings to the real estate market, the National Association of Realtors”Strongly opposed“Any attempt to reduce or eliminate it.

but As mentioned earlier, if the real estate market disappears, the cost will be minimal. Furthermore, often the homeowners who will be affected will be the wealthier among us, and even for them, the impact will be only minor.

If we want to subsidize the purchase of a house Tax credits for low-income earners meeting more meaningful. Mortgage Interest Deduction Proven become a An ineffective and mostly irrelevant tool to aid the housing market. For most of us, Won’t miss it.

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Notes on BiggerPockets: These are the opinions written by the author and do not necessarily represent the views of BiggerPockets.