Earlier this week, I released a report on which income groups benefit from mortgage-related tax deductions. It has generally been known that higher-income households reap greater tax advantages than lower-income households. Furthermore, studies have found that mortgage deductions do not necessarily increase home ownership. But they are politically popular and not going away anytime soon. Even if one assumes that there are few benefits to them, they are not harmful either, right? It depends.
If buying a home is on a individual or family’s radar screen, they can afford the payments and are not deep in other kinds of debt, it is a no-brainer. Even in a society that is more mobile and transient than ever, establishing roots, ownership and not paying perpetual rent still remains a primary goal, particularly for people who start families. But besides the home being a place to settle, households often include it in their future retirement plans as a source of income – an investment, so to speak. Indeed, according to Investopedia, 47 percent of Americans ages 50 to 70 rely on home equity as a source of retirement income. Presumably, home values increase through the years for a homeowner, who can then take out a reverse mortgage or sell the home and downsize, pocketing some cash in the process.
But the tax deductions associated with home mortgages may skew the investment choices of those who are saving for retirement. Several studies find that home ownership crowds out other investment choices. One study finds that home price risk crowds out stockholdings, particularly for younger and less wealthy households. Another study finds that increases in property values reduce stockholdings among households, while increases in home equity wealth (with no change in property values) increase stockholdings.
Policymakers reward the tilt toward home investment through the tax code by offering mortgage deductions. But that’s not all. Thanks to the Taxpayer Relief Act of 1997, homeowners can downsize by selling their primary home, purchasing a cheaper one and pocketing the capital gains tax-free.
Households are putting a lot of eggs into the home equity basket, which poses some risk for retirement security. What happens if there is another housing crash? Perhaps it’s time to rethink the tax advantages of home ownership.