Mortgage Interest Tax Deduction – (Tax Reduction)

Part 4 of, "6 Tax Breaks Landlords Get that Hurt the Economy and You"

Jun 14, 2021

Landlord Owners vs. Live-in Owners. Most live-in owners don’t get a tax deduction for the interest they pay on their mortgages but all landlord owners get a mortgage interest tax deduction on all of the mortgages they have on all of their rental houses. The government is essentially paying for part of every landlord’s mortgage so landlords can pay more for houses and bid up house prices for everyone.

Is that fair?

Family Financial Instability. By subsidizing landlord debt, the government encourages landlords to take on more debt than they would otherwise.

The subsidy increases landlord owner profits and encourages investors to jump in during the good times and that makes house price booms even bigger. But then in the bad times, landlord owners have more debt and more quickly go underwater when house prices fall. Underwater landlord owners are more likely to walk away than underwater live-in owners, and that makes house price busts bigger.

Both of those side effects of the mortgage interest tax deduction destabilize house prices, the economy, and family wealth.

Is that fair?

Fewer Jobs Created. Single-family houses have a huge natural advantage over most other investments because you can borrow a lot more money when you invest in houses compared to investing in stocks or most other things.

For example, if you invested $1 in stocks, you might be able to use that $1 worth of stocks as collateral to borrow another $1 to buy more stocks. But if you invested $1 in rental houses, you might be able to borrow another $3 to buy houses. That means with $1 to invest, you could own $2 worth of stocks or $4 worth of houses. If the price of stocks and houses both double, your $1 investment makes you $3 on the stocks but $9 on the houses.

Since you can borrow 4 times as much when you invest in houses, that also means your government subsidy (the interest tax deduction) is also 4 times greater.

The mortgage interest tax deduction for landlords takes that natural advantage of being able to borrow a lot more money and makes it unnaturally large, and causes an unnaturally large number of single-family houses to become landlord-owned.

For the economy as a whole, the problem is investing in single-family houses that were built many years or decades ago creates a lot fewer jobs – per dollar invested – than investing in businesses that are making things today, and providing services today, and creating jobs today.

When you subsidize landlord mortgage debt, it unnaturally skews investment toward single-family houses and away from investments that create more jobs per dollar invested.

Is that fair for everyone else in the economy?