Updated Options to Reform the Deduction for Home Mortgage Interest

Under current law, taxpayers may deduct interest paid on up to $1 million of acquisition debt used to buy, build, or improve a primary or secondary residence. Taxpayers can also deduct interest paid on up to $100,000 in home equity loans or other loans secured by their homes. This report analyzes four options to replace the current mortgage interest deduction with credits that are designed to improve incentives for homeownership. These options include a nonrefundable credit of up to 15 percent of eligible mortgage interest, a nonrefundable credit of up to 20 percent of eligible mortgage interest, a refundable credit of a fixed percentage of property taxes paid, and a flat amount refundable credit for all homeowners. The first two options would limit eligible interest to the amount paid on up to $500,000 of an eligible mortgage. The report also considers options that phase out the mortgage interest deduction and phase in the new credits over five years.