Many people associate the American Dream with owning a home. The homebuilding industry, especially, would like for that to be the case. To think of the United States as a nation of homeowners, however, isn’t exactly the case. While the majority of people do live in owner-occupied structures, 35% of Americans do not own their homes. For the 65% who hold property, the federal government provides a financial incentive—in the form of a tax deduction. The mortgage interest deduction allows homeowners to reduce your taxable income by the amount of money you’ve paid in mortgage interest during the year. Surprisingly, this even applies to second homes. Under current IRS rules, the interest paid on home mortgages can be deducted, up to the first $750,000 of indebtedness.
Though proponents of the MID may claim that it helps promote homeownership, “Empirical evidence indicates there is no significant positive effect of the MID on homeownership rates.” Furthermore, there is not consensus on whether homeownership is a relevant national goal for such an expensive policy to incentivize. Lastly, “[t]he MID may actually lower homeownership by putting upward pressure on home prices, suggesting a reduction in the potency of the MID may actually serve to increase homeownership. (Source: Tax Policy Center Report, 2018)
Given all of the ways in which the MID is inappropriately structured to support homeownership, it is not surprising that despite common perceptions to the contrary, the MID was never intentionally developed as a policy to expand homeownership. In fact, the policy was just a part of the general exclusion of personal interest that was included in tax policy when the federal income tax was created in 1913. Thus, it is not particularly unexpected that the MID is not successful at expanding homeownership, when it was never designed to do so. Misdirected Investments: How the Mortgage Interest Deduction Drives Inequality and the Racial Wealth Gap, October 2017
A 4,000 square foot home for sale in Terrace Park for $779,000
The IRS releases a wide range of tax data by zip code each year, allowing for the detailed analysis of different tax deductions geographically. Data include the adjusted gross income, mortgage interest deduction (MID), student loan deductions, and much more; each organized by five income brackets. An analysis of zip code level data for Ohio reveals major differences throughout the state in the rate at which homeowners claim the mortgage interest deduction and the amount claimed. The zip code with the highest average amount claimed for MID per tax return is 45174, an independent village called Terrace Park near Cincinnati.
Top 5 Zip Codes by Average Amount Claimed for Mortgage Interest Deduction, 2017Zip CodeNumber of returnsMortgage Interest PaidAverage Amount Claimed Median household income in the past 12 months (in 2017 inflation-adjusted dollars) Amount Claimed/Median Household Income45174550$6,604,000$12,007$159,6050.075452433300$38,307,000$11,608$113,6680.10244114170$1,817,000$10,688$22,3040.47944040700$7,397,000$10,567$150,6250.070430545540$53,272,000$9,616$114,3720.084
Other zip codes with high average deductions per return are 45243—includes the Village of Indian Hill, next to Terrace Park; 44114—Downtown Cleveland; 44040—Gates Mills, an eastern exurb of Cleveland; and 43054—New Albany, a northeastern suburb of Columbus where billionaire Les Wexner lives.
Top 5 Zip Codes with Highest Mortgage Interest Claimed as a Percent of Zip Code Household Income, 2017Zip CodeNumber of returnsMortgage Interest PaidAverage Amount Claimed Median household income in the past 12 months (in 2017 inflation-adjusted dollars) Amount Claimed/Median Household Income44115140$1,033,000$7,379$13,62554%44114170$1,817,000 $10,688$22,30448%43604170$949,000$5,582 $13,48441%45203140$775,000$5,536$14,36139%45229690$4,471,000$6,480$19,58233%
The data for mortgage deductions can also be analyzed based on the median household income of each zip code. As a percent of median income, the mortgage interest deduction represents more than half in one zip code: 44115, which includes parts of Downtown Cleveland and the Central neighborhood. In this case, the 140 returns filed using the mortgage interest paid had a relatively high average of $7,379, which indicates those are likely high-value homes or condos in the downtown area. The zip code, because it contains parts of the very low-income Central neighborhood, has a median annual housing income of just $13,525. This results in an extremely high figure of 54%, illustrating that the average amount of interest deducted from 140 tax returns is 54% of the zip code’s median income. In the North Avondale section of Cincinnati, the average amount claimed is just 33% of the median household income.
The above map illustrates what zip codes claimed the highest average amount of mortgage interest deduction in 2017, in five categories (natural breaks method). The darkest zip codes are typically affluent and suburban areas, like Dublin, Powell, Upper Arlington, Bexley, and New Albany—in Central Ohio. These figures show that the tax liability of high-income households in exclusive residential areas are reduced substantially by the mortgage interest tax deduction, while renters see no similar tax advantages.
On the contrary, some Ohio zip codes had no tax returns in 2017 that claimed the mortgage interest deduction. A list of these zip codes is below, but most are very rural areas that likely have very low home values. Consequently, there may be a low rate of homes owned with a mortgage. Rather, many homes may be owned outright. One notable exception is in the 43210 zip code, which represents the campus (not off-campus or University District) of The Ohio State University.
Overall, Ohioans are making significant use of the MID to lower their tax liability. While some assert that the deduction helps to encourage homeownership, there is not consensus on that topic among housing experts. Careful consideration should be given to a program that has such disproportionate benefits for high-income communities.