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MISDIRECTED HOUSING SUPPORTS: Why the Mortgage Interest Deduction Unjustly Subsidizes High-Income Households and Expands Racial Disparities
Introduction
T
he housing safety net in the U.S. was not prepared for COVID-19. Going into the crisis, more than
10.4 million renters and nearly 6.9 million homeowners were already severely housing cost-burdened,
spending more than half their incomes on housing (U.S. Census Bureau, 2020; NLIHC, 2021). Most
severely housing cost-burdened households have extremely low incomes, and they are disproportionately
households of color. Three out of four households with low incomes eligible for housing assistance, howev-
er, do not receive it due to insufcient funding (Fischer & Sard, 2017). COVID-19 exacerbated the need for
housing assistance. Low-wage workers experienced most of the job losses in 2020 (Gould & Kandra, 2021),
and consequently many were at risk of losing their homes in the midst of a pandemic. Because of the
pre-pandemic lack of a housing safety net, new emergency assistance programs had to be created from
scratch to mitigate the potential damages.
While millions of households with low incomes struggle to meet their housing costs, the U.S. tax code
provides signicant benets to wealthier, higher-income, and more often white, homeowners. The tax
code provides $25 billion per year in tax savings to afuent homeowners through the mortgage interest
deduction (MID) that owners with mortgages can claim on their federal tax returns. This tax deduction does
not incentivize homeownership, as many MID supporters claim. Instead, as we show in this research brief,
the MID contributes to economic and racial inequality, with afuent white households disproportionately
benetting from the deduction. White households account for 66% of the U.S. population, yet receive 71%
of MID’s benets. Ninety percent of the MID’s benets go to taxpayers with annual incomes over $100,000
and 63% go to those with annual incomes over $200,000 (Joint Committee
on Taxation, 2020).
In addition, the exclusion of up to $500,000 in capital gains for joint lers
on the sale of a principal residence is a costly tax expenditure to benet
homeowners, while there is no tax deduction for the sale of a home that
has depreciated in value. This tax policy disproportionately benets
white homeowners, since homes in white neighborhoods see greater
price appreciation than homes in more diverse neighborhoods (Brown,
2010; Howell & Korver-Glenn, 2020), due to factors that include racialized
appraisals and racist residential preferences. While the MID and the capital
gains exclusions provide substantial benets to select afuent households,
the country fails to invest adequate resources to help low-income
homebuyers overcome nancial challenges and to provide extremely low-
income renters with sufcient access to affordable rental housing. Socially
just housing policy would eliminate the MID in its current form. We propose
redirecting these housing resources into homeownership opportunities for
low-to-moderate-income households and into affordable rental housing for
extremely and very low-income renters.
A Closer Look at the Mortgage Interest Deduction (MID)
Contrary to popular belief, the intent of the MID was never to encourage homeownership. The MID
was created with the adoption of the U.S. federal income tax in 1913, which classied certain business
expenses as tax-deductible, including interest on all loans. At the time, personal consumption loans,
home loans, and business loans for farms, small businesses, and individual proprietors were challenging to
differentiate. Only one-third of homeowners had a mortgage, and very few beneted from the MID since
98% of households were initially exempt from the federal income tax (Ventry, 2010). The post-World War II
housing boom fueled by government-insured mortgages and the transformation of the federal income tax
While millions
of households
with low incomes
struggle to meet
their housing
costs, the U.S. tax
code provides
signicant benets
to wealthier,
higher-income,
and more
often white,
homeowners.