I keep finding very poor or misleading reporting on Housing in the US. Some of this is sloppy or lazy reportage; others reflect reporters being suckered by Think Tank spin and political narratives.

Lately, the area seems to be misreported the most is the coverage of the Mortgage Interest Deduction. The misleading impression created by some reports is that this deduction is the result of a specific policy designed to encourage home ownership. That is a false narrative, belied by history of the Federal Income tax.

Let’s take a quick look at facts so that people understand it better.

The first Federal Income tax in the US was passed in 1894, and subsequently struck down by the Supreme Court. This led to the passage of the Sixteenth Amendment (ratified in 1913), that empowered Congress “to lay and collect taxes on incomes, from whatever source derived.”

With this new power, Congress imposed the first taxes. Rates started at 1%, and rose to a whopping 7% for taxpayers with income in excess of $500,000. This applied to relatively few people, with less than 1% of the US population paying any income tax.

As an offset for the taxes, any interest paid (for any reason) was deducted. These were considered business expenses. Indeed, taxes on rents from real estate was a large revenue source. The financing costs of purchasing such rent producing property — a/k/a interest payments — was a ordinary cost of doing business, and hence, deductible.

Keep in mind that during the pre-WW1 period, there was very little interest expenses paid by individuals. Home owners typically owned their houses outright (except for farmers, who either financed or leased the land). There were no credit cards, HELOCs, revolving credit, or student loans.

The deduction on interest was never intended to be a salve to the middle class. It was not designed to encourage home ownership. Indeed, when the interest rate deduction was first considered, home financing was non-existent, and home ownership was not thought of as a public policy. It is not part of any grand scheme of social engineering, as some have called it. It simply has existed since the Federal Income tax came about a century ago.

Indeed, the entire home mortgage deduction is little more than a historical anachronism, a carry over from when all interest payments were deductible.

Now you know . . .


Housing: Still Widely Misunderstood (August 24, 2010)

History of the U.S. Tax System

See Also:
Who Needs the Mortgage-Interest Deduction?
NYT, March 5, 2006

Defending the Mortgage Interest Deduction

Category: Credit, Taxes and Policy

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

35 Responses to “A Brief History of the Mortgage Interest Deduction”

  1. mark says:

    Good stuff.

    P.S. I also think you would be well served to apply the same kind of long term historical perspective to your economic and stock market analysis.

  2. Mark, you must be new around here.

    Over the past 7 years, there have been 100s of posts looking at exactly that.






  3. philipat says:

    Take this and the other 14,999 pages of the tax code away and introduce a flat tax. The only problem would be that everyone would be able to complete and submit their own tax returns, which would put millions more out of work in both the Government AND private sectors. Efficiency?

  4. xatta says:

    Well this was certainly interesting info. But it doesn’t explain how it came to pass that interest expenses lost their deductability (for individuals) – except for interest on mortgages.

  5. They slowly were chipped away over time. Credit cards years ago; Reagan tossed the deductability of student loans, others similarly fell.

    Removing the mortgage interest tax deduction would be the biggest tax increase on the middle class in history. Its political suicide for any pol who tries to take it away, and thats why we hear it from think tanks and panels — never from those running for office.

  6. Mannwich says:

    @philip: Great point. Take away that complexity in most of our industries today, and half the population would be out of work. There wouldn’t be enough “work”, at least in the short and mid term.

  7. dead hobo says:


    Agreed that taxes are a fucking mess wrapped in a fucking mess, but let’s raise the level of intelligence a bit.

    Taxes have three basic parts: 1) Calculate income for the purpose of taxation 2) Convoluted rules for the purpose of social engineering, 3) Prevent scammers from using 1 and 2 in such a way that income disappears and is nontaxable.

    People such as yourself look at 1 and 2 and beg for more simplicity. Trickle down economics enthusiasts salivate over the new scams that will flourish to make income disappear if a flat tax is created. Point 3 exists to make things more difficult for thieves and we all pay for it. That won’t change under a flat tax. Out of necessity, a lot of unintelligible complex rules will arise to prevent new and creative tax scams.

    For example, will depreciation go away? If so, then the concept of basis goes away and so do capital gains and losses. Will income be made to disappear by making like-kind sales so you can continually write off newly acquired business assets? Will passive loss schemes arise again so massive passive losses can be ginned up, soak up real income, and them mysteriously be turned into capital gains? I think so.

    As long as we have politicians, the tax code will be a fucking mess or a give-away to the rich or both.

  8. Mannwich says:

    @dh: I think it’s always both.

  9. WFTA says:

    Simplification has never, ever, been the goal or motivation for anyone advocating change in tax policy. The serious Money wants it complicated and complicate it shall remain. As for a flat tax, I’ll agree as long as it is a tax on wealth; not on income or consumption. Any takers?

    Though it was not intended to encourage home ownership, I favor retaining the exemption on mortgage interest because I think home ownership should be encouraged. Home owners have a greater stake in their community and that is desirable.

  10. USSofA says:

    The entire home mortgage deduction is little more than a historical anachronism, a carry over from when all interest payments were deductible…..
    the mortgage deduction is a holdover from the 1986 tax changes when all other interest deductions went away

  11. dead hobo says:


    For your reading pleasure, here are just a few areas of tax law that are simple in concept if you look at them from 100,000 feet. But all exist in detail to prevent people from hiding income and, thus, are complex only to prevent scammers from pushing the tax burden onto those who can’t hide income as well. Scammers make the following an unintelligible mess:

    How about: The always popular related party transaction, passive losses, at risk amounts (you can’t write off more than you invest), installment sales, depreciation recapture, trusts, like-kind exchanges, gifting strategies, just to start. Was that thing you gave to charity a valuable piece of art or only a red brick with a happy face painted on it? Most of the rules in these areas are to prevent income from vanishing. Blame the thieves for this shit.

    Agreed that politicians make simple things like IRAs nearly unintelligible. If you combine social engineering with tax law, you have a multitude of definitions for ‘adjusted gross income’. It’s all contextual.

    Taxes suck royally, but a lot of why they suck so bad has to do with craven politicians and crooks. A flat tax will only create new problems. What we need is a wall for a few to step in front of, metaphorically speaking.

  12. philipat says:

    Personal Income is a no-brainer. Everything you make, except in the “Cash/Shadow” economy is at least double reported.

    For Corporations, if the US were to introduce a Value-added tax instead of Sales Tax, the IRS would be able to focus its super-computers on calculating revenues and, therefore, by industry norms/comparisons, expected tax receipts for each Corporation. Corporations would be totally honest about VAT collected because it would be offset against VAT paid to suppliers, therefore paying tax only on the net value added.

    Most US Corporations have a net tax rate of below what Mr and Mrs High Syreet pay because most of the profit is transfer priced through tax havens.

    SO, yes, let’s raise the intelligence level a bit. Flat tax anyone?

  13. dead hobo says:

    philipat Says:
    August 25th, 2010 at 10:02 am

    Personal Income is a no-brainer. Everything you make, except in the “Cash/Shadow” economy is at least double reported.

    SO, yes, let’s raise the intelligence level a bit. Flat tax anyone?

    A lot of what I described above applies to personal tax returns. None is W2 income.

    However, you just made an excellent case for the VAT. Apply a rate to revenues. Ignore expenses. Ignore net income. All law concentrates on not hiding revenue and not reaming the underclass.

  14. philipat says:

    On balance, I prefer the system in Hong Kong, where I lived for many years.

    Truly “Laissez-Faire” Government and probably the most free economy anywhere in the world. Personal income tax rates @ 17% AND no tax on every night spent out of Hong Kong because it is, reasonably, deemed that nights away from Hong Kong are not “working” in Hong Kong and should, therefore, not be subject to local taxes. I travelled 85% of the time.

    Then, a Company I was working with, had me in the US on a one year assignment and offered me, as one of the “Benefits” of this assignment, a Green card, and absolutely could not believe it when I politely declined.

    There’s a big world out there.

  15. TheDraconian says:

    Thanks, Barry. That was a really informative bit of history.

    Inadvertently it has today become something of an incentive to buy a house. Or to put a finer point on it, I think there’s a lot of fear that removing such an item from tax code would create a disincentive to buy a home.

  16. David Merkel says:


    Dead hobo is dead on. Leaving aside social engineering, defining what is income is tough. I have my own tax proposal that the rich would fight, but it would be fair, because it would eliminate tax deferral, which is the main way that the rich evade taxes.


  17. philipat says:

    @David Merkel

    Thanks, late night here in Bali now but for sure will read tomorrow.

    So it’s now, the “Dead-on Hobo”?

  18. Brendan says:

    Correction: I’m pretty sure student loan interest is still deductible (at least it was when I did my taxes last year). Its subtracted above the adjusted gross income line (not as an itemized deduction), which actually makes it a better deduction for recent grads than it would be if it were part of the itemized deduction. It does start to phase out at $60K or so of income, if I remember correctly.

    Regarding the flat tax, I don’t get why there are so many advocates of taxing themselves more, but I guess if that’s what you’re into…


    BR: hey, I just looked that up — but its not student loan interest that is deductible, but you can get a tax credit for “qualified education expenses.”

    The Taxpayer Relief Act of 1997 added up to $2500 per year in deductions — in 2009, for people making less than $70,000. (IRS TC456)

    It is 100% of the first $2,000 and 25% of the next $2,000 of qualified education expenses). (IRS P970)

  19. lovejoy says:

    Personal interest expense is no longer deductable except for housing. One can’t deduct interest paid on their credit cards. So the deuction for interest on mortage debt is a government subsidy.

  20. bergsten says:

    A more interesting (and probably important) bit of tax history — who thought up withholding? Absolute genius. People never see the money in the first place, so they don’t get too upset over (or even realize) how much is being taken away. Much less chance of people just not paying.

    Barry? Do you know anything about this part of tax history? I could of course look it up myself, but if “I” posted it, nobody would read it.

  21. VennData says:

    Pimco’s Bill Gross demands the gov’t backstop all his mortgage bond investments…


    I guess the Tea Partiers will all be dumping their gov’t-backed mortgages as soon as they find out how the evil gov’t interfered with their home loans.

    Business idea: re-fi Tea Partier’s 4.8% 30 year fixed loans into 9.3% with five-year balloons( which you can sell into the “free market” for mortgage loans.) Give a free musket ball with every loan.

  22. yudodat says:

    So if we are going on intent, then shouldn’t only the top 1% still be paying federal income taxes?

  23. philipat says:

    Then you will have achieved Socialist Nirvana?

    Welcome to Europe.

  24. Thor says:

    Great post BR – I do remember writing off my student loans through most of the 90′s and early last decade though.

  25. AHodge says:

    Fed intent on boosting economy through QE2 and long rates
    that means mostly via mortgages, therefore new building, turnover and refi.
    stuffing that overbuilt market further is about all fed policy has left, so chance of reform here absolute zero next two years?
    Gross was “crying like a p….” as early as AUGUST 2007. An excellent early tell on that whole market going over the falls. From an email i sent Aug 24.

    “I reread Bill Gross’ latest. I usually admire his advice. This is a desperate man, PIMCO likely holding a ton of this stuff like “everyone” else. Calling for a “reconstruction mortgage corporation” to “..admittedly bail out speculators” while helping homeowners”

    He is still at it. Would be toast without the govt trillions. if you think that fannie freddie summit he was speaking at was anything but political theater to give the Ds preelection cover, think again

  26. Jojo says:

    How much do you think housing would decline if they eliminated the mortgage interest deduction?

    For added explosive power, how about eliminating the capital gains deduction/exclusion for a sold house? I mean, everyone seems to be talking these days about how a house should not be considered an investment, right? So why should there be a deduction for any capital gains?

  27. billdozer says:

    If mortgage interest were not deductible for individuals, there would be a massive economic incentive for every homeowner to become a renter. Landlords would still be able to deduct interest (as well as other business expenses), so the deduction for individuals is necessary to maintain parity between owning and renting. I’m not saying there is parity at current price vs. rent levels, but it’s at least theoretically possible.

  28. Brendan says:


    No, really, you can deduct interest! And there’s what you mention as well. Line 33 of the 2009 form 1040 says “Student loan interest deduction.” I even get a form from my lender at the end of the year telling me how much interest I paid so I can put it on my taxes, just like I get from the mortgage company. If I’ve been doing it wrong, the IRS hasn’t caught me yet! I deducted it from 2003-2007. The last two years I’ve been over the top of the phase-out threshold, so no more deduction. So I know it’s been in place for at least the years 2003-2009, and likely many more. Clinton was a big supporter of student loans and grants, so I wouldn’t be surprised if it was something that went away and then came back sometime between 1993 and 2000. Or maybe it’s always been there. I don’t know for sure.

  29. PhilB says:

    Lets just start with one simple adjustment in the Tax Code:

    Make all profit (Capital or Income) taxed at the same rate. I cant think of any reason except for the obvious self-serving reasons (ownership of assets is concentrated in the wealthy or fueling the insanity of adding to asset bubbles).

    Money is money, so there is no reason to pervert the allocation of it or its net rewards by introducing the difference. The risk/reward of the investment should stand on its own merits.

    So many things would be simplified! Interest income, dividends, longterm vs shortterm stock gains, real estate gains, even Hedge Funds!. Its just nonsense except for the reasons i mentioned above to subsidize real asset gains. All net income (via labor or investment) should be taxed at the same rate.

    I can just see the impact on equities and bond prices! But folks, thats the reality. Equities are made to have the risk premium based on the soundness of the company, not on the fact you get taxed less than clipping coupons!

  30. algernon says:

    I believe I read that mortgage interest is not deductible in Canada. Can anyone verify that?

  31. on a tangent..

    “We couldn’t end the wars and bring all of the personnel home to a nation whose unemployment rate is already busting at the seems. Therefore, the wars are a very costly part of the welfare state. We can’t end the War on Drugs, because the DEA agents, prison guards, the court system, parole officers, and the rest of their support staff are part of the welfare nation. We can’t simplify the tax code to a flat rate with little or no exemptions, because the bookkeepers, CPAs, accounting professors, and tax attorneys are part of the welfare nation. We cannot streamline healthcare or the department of education, because they are part of the welfare nation. We can’t stop the massive “Top Secret” Surveillance-Industrial Complex, because they employ millions in the welfare nation. Finally, we can’t end the Wall Street casino, or no one will be left with a job. And this says nothing of the record 40 million people on food stamps which is considered the bad welfare by the establishment.

    It seems like the entire U.S. economy is a giant Ponzi scheme where very little tangible production happens. We live in a giant welfare economy which makes real solutions to problems nearly impossible. In fact the problems seem to be the solutions. It’s almost as if the corporate-government must keep breaking things to create false jobs and phony GDP numbers (see 9-11, WMD, BP oil spill, and Pakistan). Furthermore, the solutions offered to us tend restrict our freedom. It may be time to re-evaluate how we think of jobs and production in general as the welfare nation will soon run out of monopoly money.”

  32. willid3 says:

    while limit to net income at all? after all, the reason the tax code is so complex is because as some one pointed out is that if its only net income, some have learned how to game that system, and make it so that it appears they have no income at all, when in fact they have millions of dollars in real income that has been masked from view.

  33. mivey00 says:

    “Removing the mortgage interest tax deduction would be the biggest tax increase on the middle class in history. Its political suicide…”

    Sad but true. Though I wouldn’t be surprised (or saddened) to see the limits on the deduct-ability of mortgage interest decreased over time.

  34. Frwip says:

    Thank you, Barry. I did learned something today.

  35. rmasand says:

    The home mortgage intersst deduction distorts the body economic to almost the same extent that private campaign financing distorts the body politic and our gun laws distort the body human.