The federal tax law encourages homeownership in a big way by allowing homeowners to deduct from their income taxes the interest they pay on home mortgages.
The deduction may be used for mortgage debt totaling $1 million, and up to $100,000 in home-equity loans or lines of credit, for a principal and second home.
One study estimates that the mortgage interest deduction lowers the cost of capital for owner-occupied housing by 7 percent. Also, by allowing taxpayers to deduct mortgage interest from their taxable income, but not rental payments, the tax code creates a strong financial incentive to buy rather than rent a home.
In 2009, about 35 million households claimed the deduction, and more than 75 percent of homeowners have used the deduction at least once.
As you might expect, the mortgage interest deduction is expensive. Indeed, it’s one of the largest tax breaks in the tax code, costing about $80 billion per year. That’s why the so-called "Gang of Six," a bipartisan group of six senators that has been drafting a deficit reduction plan, has called for changes in the deduction.