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Homeownership: Do existing tax incentives increase homeownership?

The federal government spends more than $150 billion each year to subsidize homeownership yet the U.S. rate of homeownership differs little from that in countries that provide no similar subsidies. The bulk of the subsidies go to middle- and upper-income households who would likely own their homes anyway; thus these subsidies simply facilitate the consumption of more housing. In addition, evidence suggests that the tax subsidies raise housing costs, thus dissipating their effectiveness in helping people buy their own homes.

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  • The U.S. homeownership rate is roughly the same as that in many other developed countries like the United Kingdom or Australia, that have no such subsidies, and lower than in some (see figure). Other factors, such as the ease of obtaining a mortgage, home prices, and cultural patterns play significant roles in determining homeownership rates.
  • Because tax deductions are worth more to high-income households, who face the highest tax rates, the deductibility of property taxes and mortgage interest gives the most assistance to households that would likely own their own home even without a tax subsidy. Low-income households, who typically are most in need of aid to afford homeownership, get little or no benefit from that deductibility.
  • Beyond a base level, subsidies mainly support larger homes and second homes. In effect, the federal government encourages middle- and upper-income households to consume more housing than they otherwise would. Limits on the amount of mortgage debt for which taxpayers may deduct interest costs do, however, constrain those subsidies to some degree.
  • Research suggests that housing subsidies raise housing costs, particularly where land is relatively scarce. By reducing the after-tax cost of housing, the subsidies enable people to pay more than they otherwise would. The resulting increase in demand for housing causes prices to rise and prices rise most in markets where supply cannot easily increase to meet that higher demand.
 
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