The individual income-tax code offers a multitude of benefits for home owners.
The largest in dollar terms, and the most apparent to taxpayers, is the mortgage-interest deduction, which allows home owners to deduct the interest paid on up to a $1 million mortgage and up to $100,000 in additional debt backed by home equity.
- The tax code also tilts the balance toward home owners by allowing a deduction for state and local property taxes and exempting from taxes the capital gains from the sale of a home.
- Proponents of these generous tax benefits often justify them by arguing that they encourage home ownership, which in turn is said to offer society all manner of social and civic benefits
The mortgage-interest deduction is the most visible and widely discussed tax break for housing, but it is by no means the only one.
- Uncle Sam also allows home owners to deduct the amount they pay in state and local property taxes, and most capital gains from a sale of a home is excluded from taxable income.
- The capital-gains allowance is generous: Most taxpayers are not responsible for income-tax payments upon realizing even a $250,000 gain from the sale of their home.
Beyond pushing home sizes upward, the tax preferences for home ownership shape home buyers’ behavior in several other ways.
- Because the mortgage-interest deduction can be applied to both a primary and secondary residence, it encourages the purchase of vacation homes.
- The increase in home sizes, encouragement of second-home purchases, and preference for debt financing are all examples of how housing’s tax preferences distort consumer behavior.