Homeownership No Longer Has Tax Savings

by Gary Peruzzini

We believe we have found one of the primary reasons why entry-level home buying has not recovered—and why homeownership has been plunging.

For decades, homeowners benefitted from both the financial and psychological benefits of paying less taxes. Homeownership came with income tax savings because mortgage interest plus property taxes easily exceeded the standard deduction allowed by the IRS. For most American homeowners that has not been true since 2008 because:

  • Falling interest rates and home prices have reduced mortgage interest.
  • The standard marital deduction has risen from $1,300 in 1972 to $12,600 today, meaning that the first $12,600 of itemized deductions has no benefit to consumers.

Today, a typical first-time home buyer financing 95% or less of a median-priced US home pays less than $12,000 in mortgage interest and property taxes, which is not enough to warrant itemizing. Even with other deductions that bring the taxpayer over the $12,600 limit, the tax savings are minimal. Years ago, we eliminated income tax savings from our calculation of the rent-versus-buy decision, and I cannot remember the last time I heard a prospective first-time home buyer (not in California or New York) mention income tax benefits as a reason for buying.

In the graph below, we show the change over time for a typical homeowner couple with an 80% loan-to-value mortgage and a 1.5% property tax rate on the median-priced US home. That owner paid mortgage interest and property taxes in excess of the standard deduction every year from 1972 to 2008. Today, that homeowner’s deductions fall nearly $2,500 short of the standard deduction.

Rarely do I publish others work in totality however this is produced by John Burns Consulting and is extremely relevant.

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