April 13th, 2011

That Mortgage Interest Deduction

I keep hearing people say that the mortgage interest deduction subsidizes home owners. While that's no doubt true in one sense, it seems to me that it simply levels the playing field between home owners and renters.

If the Joe Corporation buys a house for rental purposes and takes out a loan to finance the purchase, JoeCorp gets to deduct the interest. If the interest is deductible on a rental property, why shouldn't it be deductible when you're buying your home?

In my heretical moments, I think that all consumer interest should be deductible. There's an economic stimulus that would hit a lot of people who need it the most.

The place where home owners clearly do receive a tax subsidy is with the capital gains exclusion on the sale of a home. Of course, some of those gains aren't real (especially now) -- they're simply inflationary gains over 30 years. You can also make a strong argument that all taxes on capital gains index the underlying asset to inflation.

But that's yet another discussion.