Home mortgage interest deduction

From Wikipedia, the free encyclopedia

A home mortgage interest deduction allows taxpayers who own their homes to reduce their taxable income[1] by the amount of interest paid on the loan which is secured by their principal residence (or, sometimes, a second home). The mortgage deduction makes home purchases more attractive, but contributes to higher house prices.[2][3]

Most developed countries do not allow a deduction for interest on personal loans, but the Netherlands, Switzerland, the United States, Belgium, Denmark, and Ireland allow some form of the deduction.

Status in countries[edit]


Canadian federal income tax does not allow a deduction from taxable income for interest on loans secured by the taxpayer's personal residence, but landlords who own rental residential or commercial property may deduct mortgage interest as a reasonable business expense; the difference between the two being that the deduction is only allowed when the property is not for the taxpayer's personal use, but is rented as a business.[4] However, there may be additional exclusions for passive activity losses.

An indirect method, known as The Smith Manoeuvre,[5] for making interest on mortgage for personal residence tax deductible in Canada is through an asset swap, whereby the homebuyer sells his existing investments, purchases a house in full or in part by the sale, gets a mortgage on the house, and finally, buys back his investments with the money from the mortgage.[6]

The Supreme Court of Canada has ruled in 2001 in the Singleton v. Canada case[7] that transactions in the asset swap are to be regarded as distinct, thus rendering the interest on home mortgage acquired as part of the asset swap tax deductible.

The home ownership rate in Canada was about the same as in the United States in 2008[8] despite the difference in tax policy. Notably, though, the proportion of residential properties used to secure a mortgage in Canada is much lower than in the USA; Canadians, lacking mortgage interest deductability, tend to pay off their residential mortgages faster than their US counterparts.

In counterpoint, capital gains realised from the sale of a taxpayer's personal residence are not taxable under Canadian law. This does not apply to secondary residences.


In Denmark part of the interest is deductible. In 1987 it was 73%. In 1993 it was 50% and in 1998 it was 46%. From 1998 to 2001 it was reduced to 32%. It was proposed in 2019 to lower it to 25.5% but it was not adopted. There have been minor changes up and down and the rate is today 33.5%.[9]


France does not allow a home mortgage interest deduction. In 2007, newly elected President Nicolas Sarkozy proposed creating the deduction as part of his legislative plan for sparking the French economy.[10] In August 2007, the Constitutional Council, the highest court in France, struck down the mortgage interest deduction as unconstitutionally creating a tax advantage that goes far beyond its stated goal of encouraging non-homeowners to buy homes. The Court noted that the deduction would apply to people who already own homes.[11]


Home loan interest portion is deductible (under section 24(b)) up to 150,000 rupees in a tax year for acquiring or constructing a property. The deduction is available only when the construction is complete or the owner takes possession of the property. Interest of pre-construction period is deductible in five equal installments. The first installment is deductible in the year in which construction of property is completed or property acquired. The principal is deductible under section 80C, which has a limit of 150,000 rupees.[12][13]


In the Netherlands, a part of the interest payments can be deducted for a maximum period of 30 years. The deduction percentage is based on a person's income.[14] However, before deduction the taxable income is increased by a percentage of the property value (so-called "notional rental value"[15]) with the reasoning that the property has a potential income-generating purpose.

Still in place currently, the mortgage interest tax deduction is subject to fierce debate, and a political issue during most recent elections.[16] Although largely an emotional point of discussion with the Dutch electorate, and described by many as "political suicide", most Dutch people believe that the mortgage interest tax deduction will eventually be reformed.[17] Many reasons for abolishment have been identified, often fuelled by a political ideology (e.g. creating house price inflation, limiting government earnings in times of economic downturn, mortgage interest tax deduction is increasing already high tax levels in the Netherlands, benefiting high income individuals more disproportionally).[18][19][20][21]

As it stands now, Dutch politicians and other organisations research possible strategies to end interest payments tax deduction and are fuelling public debate to prepare the Dutch public for eventual abolishment.[22][failed verification] Only 18% of the Dutch public support eliminating the mortgage interest deduction entirely.[22]


Norway considers any interest paid, whether it is for a home mortgage or other debt, as a deductible expense.[23] The result is a reduction of the tax bill of 22% of all interest paid.[24] The fact that the government in effect subsidises 25% of the interest bill has made home ownership highly beneficial in Norway, and critics argue that the deduction has increased the cost of real estate. The Center Party has proposed reducing the deduction.[25]


For any personal loan except student loans, a tax credit of 30% of interest up until 100,000 SEK, and 21% over that amount.[26] The amount was about 10,000 SEK per taxpaying person with debts.[27]

United Kingdom[edit]

When income tax was first introduced in the United Kingdom in the early 19th century, interest on loans could be set against tax. However, in 1969 the then Chancellor of the Exchequer, Roy Jenkins, ended this tax relief for all loans except for business purposes or for home buyers. This meant that borrowers could no longer claim tax relief on, for example, the interest on bank loans or overdrafts, but relief on home loans was still available.[28]

In 1983, the Government introduced a scheme for home loans called MIRAS, which, by limiting the available relief to the basic rate of tax, aimed to reduce the benefit of the tax relief.

Reductions during the 1990s in the amount of tax relief that was included with MIRAS loan repayments gradually cut its value until it was abolished in 2000 by the then Chancellor Gordon Brown.

United States[edit]

Prior to the Tax Reform Act of 1986 (TRA86), the interest on all personal loans (including credit card debt) was deductible. TRA86 eliminated that broad deduction, but left the narrower home mortgage interest deduction.[29][30] While some Americans may believe that Congress created the home mortgage interest deduction as a way to encourage home ownership,[31][32] historians point out that this was never the case, as explained in a New York Times article that notes that, in 1913, when interest deductions started, Congress "certainly wasn't thinking of the interest deduction as a stepping-stone to middle-class home ownership, because the tax excluded the first $3,000 (or for married couples, $4,000) of income; less than 1 percent of the population earned more than that;" moreover, during that era, most people who purchased homes paid upfront rather than taking out a mortgage. Rather, the reason for the deduction was that in a nation of small proprietors, it was more difficult to separate business and personal expenses, and so it was simpler to just allow deduction of all interest.[29][30]

Under 26 U.S.C. § 163(h) of the Internal Revenue Code, the United States allows a home mortgage interest deduction, with several limitations. First, the taxpayer must elect to itemize deductions, and the total itemized deductions must exceed the standard deduction (otherwise, itemization would not reduce tax). Second, the deduction is limited to interest on debts secured by a principal residence or a second home. Third, interest is deductible on only the first $1 million of debt used for acquiring, constructing, or substantially improving the residence, ($500,000 if filing separately) or the first $100,000 of home equity debt regardless of the purpose or use of the loan.

In the United States, there are additional tax incentives for home ownership. For example, taxpayers are allowed an exclusion of up to $250,000 ($500,000 for a married couple filing jointly) of capital gains on the sale of real property if the owner used it as primary residence for two of the five years before the date of sale. Economists have demonstrated that high-cost high-income areas receive most of the tax benefit. For example, in 1999, San Francisco, California received $26,385 per home while El Paso, Texas received $2,153 per home, a 1,225% difference.[33] In 2005, the five highest income metros received 87% of tax inflows, with over half going into California alone.[34]

Policy debate[edit]

The deduction is the focus of policy debate in the United States. The standard justification for the deduction is that it incentivizes home ownership.[29] but most economists believe the deduction is bad policy and is counterproductive.[35] They note that it increases inequality, is an unnecessary market distortion, and contributes to housing unaffordability.[36]

The National Association of Realtors strongly supports mortgage interest deduction; in 2008, the association contended that "Home prices, particularly in high cost areas, could decline 15 percent if recommendations to convert the mortgage interest deduction to a tax credit are implemented."[37]

The Tax Foundation, by contrast, argues that few low- and middle-income taxpayers benefit from the deduction,[38] calling it a subsidy for the real estate industry.[39] Alan Mallach, a senior fellow at the Center for Community Progress and a visiting scholar at the Federal Reserve Bank of Philadelphia, argues that the deduction artificially inflates home prices.[40] According to a 2013 analysis, conversion of the tax deduction to a tax credit, and reduction of the amount of principle covered by the credit, would raise about $200 billion over ten years.[41]

Economist Edward Glaeser remarked in The New York Times that the policy "is public paternalism at its worst" and wrongfully "encourages people to leave urban areas" as well as to borrow as much as possible to bet on housing.[42]

In a 2012 panel on PBS Need to Know, Eliot Spitzer, the former Democratic governor of New York; tax law professor Dorothy A. Brown; Reagan domestic policy advisor Bruce Bartlett; and libertarian economist Daniel J. Mitchell unanimously opposed the federal mortgage interest deduction.[43]

A 2018 American Economic Review study found that eliminating the mortgage interest deduction would causes reductions in house prices, increases in homeownership, decreases in mortgage debt, and welfare improvements.[2]

Effect of the Tax Cuts and Jobs Act of 2017[edit]

Because the Tax Cuts and Jobs Act of 2017 increased the standard deduction to a level where far fewer taxpayers itemized their expenses (which is where they deduct mortgage interest), the cost to the federal government of the mortgage interest deduction was decreased by 60%, from approximately $60 billion in 2017 to $25 billion in 2018.[44][45]

See also[edit]


  1. ^ "Archived copy". Archived from the original on 8 August 2016. Retrieved 17 June 2016.{{cite web}}: CS1 maint: archived copy as title (link)
  2. ^ a b Sommer, Kamila; Sullivan, Paul (February 2018). "Implications of US Tax Policy for House Prices, Rents, and Homeownership". American Economic Review. 108 (2): 241–274. doi:10.1257/aer.20141751. ISSN 0002-8282.
  3. ^ Kholodilin, Konstantin A.; Kohl, Sebastian; Korzhenevych, Artem; Pfeiffer, Linus (2022). "The hidden homeownership welfare state: an international long-term perspective on the tax treatment of homeowners". Journal of Public Policy. 43: 86–114. doi:10.1017/S0143814X2200023X. ISSN 0143-814X.
  4. ^ "Is Interest Deductible?". 21 September 2020.
  5. ^ "The Smith Manoeuvre Official Website".
  6. ^ "The Smith Manoeuvre: A Canadian mortgage tax-deductible plan".
  7. ^ "Supreme Court of Canada: Singleton v. Canada, 2001 2 S.C.R. 1046, 2001 SCC 61". Archived from the original on 18 May 2010. Retrieved 29 August 2010.
  8. ^ Zakaria, Fareed (6 February 2009). "Zakaria: The Canadian Solution". Newsweek.
  9. ^ www.boligsiden.dk Deduction Denmark
  10. ^ "Sarkozy Defeats Royal in French Presidential Runoff (Update5)". Bloomberg. 6 May 2007.
  11. ^ "Décision n° 2007-555 DC du 16 août 2007 | Conseil constitutionnel". www.conseil-constitutionnel.fr.
  12. ^ "The Multiple Benefits of Home Loan Tax Exemption". easyfinance.com.
  13. ^ "Home Loan Deduction". mytaxes.in. Archived from the original on 27 November 2010.
  14. ^ "Mortgage interest and other deductible expenditure on owner-occupied property". belastingdienst.nl. Archived from the original on 1 April 2009.
  15. ^ "Owner-occupied property". belastingdienst.nl. Archived from the original on 17 April 2009.
  16. ^ "Verkiezingen 2010: hypotheekrenteaftrek en huur" (in Dutch). nuzakelijk.nl. 1 June 2010. Retrieved 23 February 2012.
  17. ^ "Taboe voor politici, niet voor de kiezers" (in Dutch). NRC Handelsblad. 11 April 2006. Retrieved 23 February 2012.
  18. ^ nl:Hypotheekrenteaftrek
  19. ^ "Hypotheekrente weer ter discussie" (in Dutch). NOS Nieuws. 17 October 2007. Archived from the original on 29 September 2012. Retrieved 23 February 2012.
  20. ^ "Argumenten voor - tegen beperking hypotheekrenteaftrek" (PDF) (in Dutch). BouwendNederland. Archived from the original (PDF) on 24 July 2011. Retrieved 23 February 2012.
  21. ^ "Hypotheekrenteaftrek: Veelgestelde vragen" (in Dutch). De hypotheker. Retrieved 23 February 2012.
  22. ^ a b http://www.tns-nipo.com/pages/nieuws-pers-vnipo.asp?file=persvannipo\pol_woningmarkt-08062010.htm [permanent dead link]
  23. ^ "rentefradrag" (in Norwegian). Store norske leksikon. Retrieved 31 May 2013.
  24. ^ "Rentefradraget blir mindre verdt" (in Norwegian). Nettavisen. 8 October 2015. Retrieved 22 November 2016.
  25. ^ Natland, Jarle (7 April 2013). "Sp vil kutte rentefradrag på private boliglån" (in Norwegian). Aftenbladet. Retrieved 31 May 2013.
  26. ^ "Avdragslexikon för privatpersoner - R".
  27. ^ "Slopat ränteavdrag hot för familjer" (in Swedish). Svenska dagbladet. 29 September 2014. Retrieved 29 September 2014.
  28. ^ "The Times". 16 April 1969: 25. {{cite journal}}: Cite journal requires |journal= (help)
  29. ^ a b c Lowenstein, Roger (5 March 2006). "Who Needs the Mortgage-Interest Deduction?". The New York Times.
  30. ^ a b VENTRY, DENNIS (2009). "THE ACCIDENTAL DEDUCTION: A HISTORY AND CRITIQUE OF THE TAX SUBSIDY FOR MORTGAGE INTEREST". Duke University Law. p. 236. Archived from the original on 26 January 2012. Retrieved 19 January 2018. Whatever the original motivation for the consumer interest deduction, one thing is clear: Congress did not see it as a way of promoting homeownership. ... Part II of this article examines the origins of the deduction for personal interest alongside the birth of the modern federal income tax and concludes that the deduction had nothing to do with encouraging or rewarding homeownership.
  31. ^ Bartlett, Bruce (6 August 2013). "The Sacrosanct Mortgage Interest Deduction". The New York Times Company. Archived from the original on 20 October 2017. Retrieved 19 January 2018. Contrary to popular belief, the mortgage interest deduction wasn't adopted to encourage home ownership.
  32. ^ "Do existing tax incentives increase homeownership?" (PDF). Taxpolicycenter.org. Archived (PDF) from the original on 19 January 2018. Retrieved 19 January 2018. Contrary to popular belief, the mortgage interest deduction was not added to the tax code to encourage home ownership. The deduction existed at the birth of the income tax in 1913—a tax explicitly designed to hit only the richest individuals, a group for whom homeownership rates were not a social concern.
  33. ^ See Table 4 in Sinai, Todd; Gyourko, Joseph (2004). "The (Un)changing Geographical Distribution of Housing Tax Benefits: 1980–2000". Tax Policy and the Economy. 18: 175–208. doi:10.1086/tpe.18.20061889. S2CID 153116751.
  34. ^ Gyourko, Joseph; Sinai, Todd (2003). "The Spatial Distribution of Housing‐Related Ordinary Income Tax Benefits". Real Estate Economics. 31 (4): 527–575. doi:10.1046/j.1080-8620.2003.00076.x.
  35. ^ Matthews, Dylan (11 December 2015). "America's biggest housing program is run by the IRS, and it's a huge giveaway to rich people". Vox. Retrieved 1 April 2020.
  36. ^ Casselman, Ben (3 April 2015). "The Tax Deductions Economists Hate". FiveThirtyEight. Retrieved 1 April 2020.
  37. ^ "NAR: Defending the Mortgage Interest Deduction". Archived from the original on 14 February 2008. Retrieved 23 January 2008.
  38. ^ "Who Benefits from the Home Mortgage Interest Deduction?". Tax Foundation. 6 February 2006.
  39. ^ "Some Facts About the Mortgage Interest Deduction". Archived from the original on 17 February 2008. Retrieved 23 January 2008.
  40. ^ "Home Loan: How to Reduce The Burden". planmyloan.com. Retrieved 22 February 2014.
  41. ^ Will Fischer & Chye-Ching Huang (25 June 2012). "Mortgage Interest Deduction Is Ripe for Reform: Conversion to Tax Credit Could Raise Revenue and Make Subsidy More Effective and Fairer". Center on Budget and Policy Priorities.
  42. ^ Glaeser, Edward L. (15 March 2011). "If the Tea Party Went Downtown". The New York Times.
  43. ^ "Cleaning up the tax mess". PBS. 9 March 2012.
  44. ^ Weissmann, Jordan (24 May 2018). "Republicans Gutted the Mortgage Interest Deduction. Democrats Should Finish It Off". Slate. Archived from the original on 1 May 2018. Retrieved 7 November 2019. This week, Congress's Joint Committee on Taxation offered new projections showing just how radical this move was. The report predicts that just 13.8 million households will subtract mortgage interest from their 2018 returns, down from 32.3 million in 2017. The total cost of the deduction will fall from $59.9 billion to $25 billion—a drop of about 58 percent.*
  45. ^ Mark P. Keightley, An Economic Analysis of the Mortgage Interest Deduction, Congressional Research Service (June 25, 2020).