Housing Tax Deductions Benefit Younger Taxpayers More says Study

Research released by the National Association of Home Builders (NAHB) shows that benefits of housing related tax deductions, including mortgage interest deductions, generally decline in value as taxpayers get older. These findings are a counter argument to the claims that mortgage interest deductions exclusively benefit high-income households, as this research clearly shows that younger, first-time homeowners seem to benefit greatest.

“Opponents falsely argue that the deduction is only for the wealthy but it is clear that the mortgage interest deduction is also of great value to younger homeowners,” said Robert Dietz, Assistant Vice President for Tax and Policy Issues for NAHB. “Any tampering with this deduction would have a disproportionate impact, as a share of household income, on younger homeowners who have relatively higher mortgage interest payments. These are households who have growing demand for homeownership due to marriages and children.”

Conducted for the first time by the NAHM, the research outlining how various tax deductions are used by different age groups using data from the Internal Revenue Service Statistics of Income (SOI).  Results showed that the biggest beneficiaries of the various tax deductions in general are younger households, which typically have bigger mortgages, smaller amounts of home equity, and expanding family size.


The average mortgage interest deduction is at its peak for taxpayers from 35 to under 45, followed by the 18 to 34 age group and declines as taxpayer age increases. The reason for this result is that mortgage interest deductions peak soon after the taxpayer switches from being a renter to a homeowner and declines over time as the homeowner pays down their existing mortgage debt and increase their home’s equity.

Research also found that the largest share of those claiming deductions for mortgage insurance was the 18 to under 45 age group, at 59 percent.

However, for smaller tax deductions, like state and local real estate tax, the value of real estate tax deductions increase as the taxpayers get older. This can be attributed to the increase in home value, as the household income and wealth increase. Both housing deductions, mortgage interest and real estate taxes, are considered a share of household income for these older taxpayers. On the other hand, non-housing deductions, such as medical expense, charitable contribution, and investment interest expense deductions, increase for taxpayers in the 65 and older age group.

To read the full NAHB Report, “Housing Tax Incentives: Most Helpful to Younger Households” see here.

Written by Kelly Mellott

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  • There is a proposal that the maximum debt on acquisition indebtedness be lowered from its current $1,000,000 level to $750,000. For those who currently obtain benefits from this deduction as a result of qualifying under this provision and have qualified debt in excess of $1,000,000 would see a reduction in their deduction of 25% as a result of such a provision. The data Kelly cites could justify that position due to the fact that few homes with mortgages over $750,000 are owned by those under 40, especially if the justification for the move is to retain the current help for younger homeowners so that they can provide homes for their families.

    Of course, like any CPA who has substantial experience in tax matters, I reject the concept. Worse the data does not address reverse mortgages as a separate category. To the surprise of absolutely no tax professional, most IRS personnel have never dealt with the interest deduction on a reverse mortgage.

    Very few reverse mortgage borrowers go to tax advisors and most will only have the deduction of interest on their reverse mortgage available to them in one tax year. Few have the income to obtain any substantial benefit from the deduction of the interest to the extent it may be available when it is “paid.” Unfortunately because seniors are not aware of what can be done with the tax deduction, several have failed to seek advice when deductibility of the interest would have been helpful such as a year when they were forced to receive substantial required minimum pension distributions in one year or in a tax year when they were converting taxable IRAs into Roth IRAs. They are also unaware when accrued interest on a reverse mortgage is considered “paid.”

    In 2007, I was called into a meeting to discuss the deductibility of interest in relation to a $6,000,000 reverse mortgage which was being refinanced. The borrower made it clear that he and his CPA had determined that because of a grandfathering provision about which I was inquiring regarding his eligibility, he was not limited to the current acquisition or equity indebtedness provisions which would have greatly limited his deduction. With no cash paid out-of-pocket and no costs incurred because of refinancing, the borrower with substantial taxable income was able to obtain an interest deduction which was worth over $250,000 in lower income taxes and in the process saw his interest rate drop over 1.4%. Of course those situations were rare then and because of few proprietary reverse mortgage alternatives today, are even rarer today.

    Stripping out any part of the interest deduction is imprudent. It is too bad that those with reverse mortgages have such little help on this subject.

  • NAHB has a vested interest in maintaining the home mortgage interest deduction. While intended to promote home ownership, some have argued that that this tax policy encourages home buyers to acquire more housing than they need and larger mortgages than they can afford.

    When the spending (or investment) decisions of consumers or businesses are motivated by tax (rather than purely economic) considerations, the results may be less than optimal.

    • HECM Dude,
      There is an old saying in the tax community that if the dog is the transaction and the tail is the related tax, never allow the tail to wag the dog.
      The economic substance of the transaction has not just been a discussion in the business community in the last few decades, it has been the topic of tax legislation in earnest since the late1960s. It reached a zenith in the Tax Reform Act of 1986.
      The mortgage industry generally gets things backwards. Home values are based on availability of mortgages and the ability of homeowners to afford mortgages is based on monthly payments net of the income tax impact. The decision to subsidize home acquisition goes back at least to Daniel A. Reed and the 1954 Internal Revenue Code. The home mortgage interest deduction was radically adjusted in the Tax Reform Act of 1986.
      What is not being addressed by the flat tax advocates is that for over half of a century, homeownership has been subsidized by the federal and state income tax systems. Suddenly stopping the deduction now means that those who acquired their homes relying on such history would be harmed. While the same thing was true in 1986, only those who acquired homes prospectively were harmed. All of the existing mortgages were grandfathered and the old rules applied to the deduction of interest related to those taxpayers and those mortgages (including refis up to the amount sitll being grandfathered).
      The radical notion that the home mortgage interest deduction should come to a sudden end is not only ridiculous, it would result in massive foreclosures. Perhaps a stepped approach as started in the 1986 Tax Reform Act is warranted but only if it is handled in exactly the same way with grandfathering of existing mortgages. Of course if you think home values are low now, wait to see what happens then. Then there is the new layer of complexity which would be added to the home interest deduction by a stepped reduction.
      Of course, then the argument goes on and on. Why would the government remove the subsidy for homeowners and not remove the subsidy for renters? If the interest deduction is supporting home prices, how much more is it supporting rental units? If landlords did not have a deduction for interest on their rental units, imagine how much renters would see their rents go up.

      • I don’t believe there was anything in my post that advocated the elimination, either suddenly or gradually, of the home mortgage interest deduction. However, I would not be surprised if the idea ends up on the plate of the bipartisan task force on deficit reduction. We must be prepared to discuss it and give policy makers our input.

        If the virtually unlimited mortgage interest deduction truly is stimulating unsustainable consumer behavior, perhaps it should be modified in a revenue-neutral fashion. This is not a radical idea as it is beginning to gain some traction among economists of varying ideology. Here’s an article that appeared recently in MarketWatch:

        Mortgage-interest deduction under scrutiny

        The mortgage-interest tax deduction has come under scrutiny lately as the country searches for ways to get an escalating deficit under control. Not surprisingly, the leadership at the National Association of Realtors is against the idea of axing the deduction that homeowners take on their income taxes each year — a sentiment expressed by the group’s chief economist on Friday.

        “Many people bought a home knowing these were the rules of the game,” said Lawrence Yun, NAR chief economist in a talk at the group’s annual conference in New Orleans this weekend. If the tax deduction were eliminated, he said, home prices would fall 15%.

        No group — be it the agriculture industry, energy industry or housing industry — is happy at the prospect of giving up subsidies, said Thomas Hoenig, president of the Kansas City Federal Reserve Bank. But if nothing is done to ease the deficit, it could lead to a very strong inflationary environment, he said.

        “We’re going to have to make some hard decisions with this thing,” Hoenig said. “I’m not saying remove it… but if we [keep it] without making some shared sacrifices, we’re going to pay in another form.”

        Read more in this week’s Real Estate pages, including more coverage from the Realtors conference, a Realty Q&A on when to rent out that home you’ve been trying to sell, and a Home Economics column about whether it’s smart to refinance even if your mortgage loan is only a year old.

        It would be unlikely for the mortgage-interest deduction to be eliminated entirely, Yun said. But it’s not out of the realm of possibility that one of the government’s answers to the country’s deficit problem includes chipping away at it, at least somewhat.

        —Amy Hoak
        mailto:ahoak@marketwatch.com, Real Estate writer

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