Homeownership and Taxes: How the TCJA Altered the Tax Code's Treatment of Housing

The federal government has long promoted homeownership through various provisions in the US income tax code. The Tax Cuts and Jobs Act of 2017 (TCJA) renewed interest and debate about the treatment of housing via the tax code, particularly with respect to the mortgage interest deduction and the limitation on deductions for state and local taxes. We document the extent that the TCJA magnifies the long-standing unequal treatment of debt and equity financing of homeownership in the tax code. Our analysis indicates that most households no longer benefit from mortgage interest and property tax deductions. We also show how the limitations on the deduction of state and local taxes alter the costs associated with homeownership across geographic areas, and we provide detailed calculations of the average and marginal tax rates at which housing-related expenses are deducted. The former are relevant to the tenure choice decision, the latter to the quantity demanded decision. Finally, we document that the lost tax savings associated with the inability to benefit from mortgage interest and property tax expenditures are often small relative to the primary tax benefit owners still enjoy: the nontaxation of the return on equity invested in the home.