Since its inception a century ago, the individual income tax code has been exceedingly generous to homeowners.  Homeowners may deduct the interest paid on up to $1 million in mortgage loan debt; an additional $100,000 in debt backed by home equity; and state and local property taxes. The tax code also exempts nearly all capital gains from the sale of a primary residence from tax payments.

This paper examines the tax breaks for housing and has four central findings:

  1. The value of the most noticeable and popular of these tax breaks, the mortgage interest deduction (MID), differs vastly across income groups and metropolitan areas.  For example, among Chicago taxpayers who earn less than $100,000, less than 25 percent take the mortgage interest deduction and they save an average of $1,900 in taxes. Among taxpayers who earn more than $100,000, 78 percent take the MID and, on average, their tax savings are 2.5 times as large as those earning less than $100,000
  2. The benefits from the MID are heavily skewed toward suburban areas of major metropolitan areas, with the typical suburb having between 1.5 and 2 times the share of taxpayers claiming the deduction.
  3. The total package of housing tax breaks greatly reduces the cost of consuming housing, but does so unevenly across metropolitan areas.  Tax breaks reduce the annual cost of owning a home by more than $10,000 in places like Los Angeles, but by less than $2,000 in Atlanta.
  4. The cost reduction caused by housing tax breaks does little to induce homeownership, but instead contributes to the building of larger, McMansion-style homes. We estimate that houses today are between 250 and 1,000 square feet larger than they otherwise would be, owing to the package of tax breaks. This is because the deductions are claimed overwhelming by upper-income tax filers, who are not on the margin between owning and renting a home. Instead, the size of the tax breaks help them decide how much extra space to purchase or build.

Proponents of housing tax breaks liken homeownership to apple pie and the American flag, arguing that homeownership leads to greater community engagement and a plethora of other socially desirable behaviors. Without the tax breaks, proponents argue, millions of Americans who currently are homeowners would otherwise be unable to purchase a home.

This argument has two flaws. The notion that homeownership induces salutary behaviors – rather than it simply being the case that such habits are correlated with having the wherewithal to buy a house – is a dubious proposition, more wishful thinking than accepted wisdom.  An even bigger problem facing apologists for the current system is that the existing tax breaks do almost nothing to increase homeownership. Instead, they mostly serve to encourage people who already have the financial means to buy a house to purchase larger homes and take on more debt. The ability to deduct mortgage interest and property taxes, in fact, gives very little to a middle-class family who would otherwise be on the margin of affording to buy a home.

A major flaw in the design of existing homeownership incentives is that most are tax deductions, which by definition are more valuable to those who face higher marginal tax rates.  A progressive tax code like our current system, where marginal rates on income range from 10 percent to nearly 40 percent, means that people who pay only the lowest marginal tax rates receive relatively modest savings from any deductions. High-income households who pay on income earned in the top tax brackets receive a much bigger break.

It isn’t just the tax code’s progressivity that skews housing tax breaks’ benefits toward the wealthy; the fact that households can deduct interest on a mortgage as large as $1 million means that nearly all homeowners are able to deduct every dime of the mortgage interest they pay from their taxable income, even the very wealthy.

The high deductibility limit and the tax code’s progressivity result in the benefits from the mortgage interest deduction being widely skewed across the country, both geographically and across income groups.  Homeowners in wealthy communities with high housing costs—mainly in the suburbs of major metropolitan areas on the East and West coasts—receive tax benefits much larger than those living in less expensive inner-city neighborhoods or in smaller communities in the middle of the country, where housing prices are more modest.

To give just one example of the discrepancy in tax benefits, the average homeowner in the San Francisco area receives an annual reduction in the cost of home ownership of more than $12,000 a year from the package of tax benefits available in the federal tax code. By contrast, the average savings to a home-owning family in Flint, Mich. is barely more than $500.


This policy study was co-authored by Ike Brannon and Zackary Hawley. To download the authors’ detailed spreadsheets on the impact of housing tax preferences in each metropolitan statistical area,  please click here.