Challenging the Narrative: Why the Mortgage Interest Deduction Is Overrated and Not Worthy of a Fight

Following the National Association of Realtors' $418 million settlement and the removal of the 6% commission, discussions are now shifting towards the mortgage interest deduction. Despite concerns about its potential demise amidst anti-real estate investor legislation, it's important to recognize that this deduction isn't as significant as it may seem. Eliminating it wouldn't have a substantial impact and isn't a battleground worth fighting for in the real estate investment realm.

Firstly, the mortgage interest deduction yields approximately $30 billion in tax savings annually, down from $60 billion post the Tax Cuts and Jobs Act of 2017. While this figure may sound substantial, it pales in comparison to other financial metrics:

Property taxes alone amassed $630.2 billion for states in 2021.

Total home sales in 2023 reached 4.1 million, with an average price of $511,100, totaling $2.1 trillion in sales volume.

The federal government collected $4.4 trillion in taxes in 2023.

The estimated value of all real estate in the United States stands around $47 trillion as of June 2023.

Therefore, in the grand scheme of things, the mortgage interest deduction is relatively insignificant.

The deduction permits homeowners who itemize to deduct interest payments on up to $750,000 of their loan principal (reduced from $1 million after the Tax Cuts and Jobs Act of 2017). However, this deduction isn't substantial, considering that the standard deduction is $14,600 for single filers and $29,200 for married couples filing jointly in 2024.

Critics argue that this deduction primarily benefits higher-income brackets, pushing up home prices and debt levels for wealthier individuals who can afford homes without the deduction. Moreover, studies suggest that eliminating the deduction may have a slightly positive impact, including decreasing mortgage debt and improving overall welfare.

Concerns about real estate investors are unfounded, as the deduction does not apply to them. Rental property owners can deduct necessary expenses, including interest, without a $750,000 cap, making it a non-issue for real estate investments.

In conclusion, while the mortgage interest deduction has historically been defended, its removal wouldn't significantly impact the housing market or real estate investors. Redirecting resources towards more effective homeownership subsidies, particularly for lower-income individuals, may be a more sensible approach.

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