The Congressional Research Service (CRS) released the In Focus report (IF 12789 ) at the US Library of Congress on 22 October 2024. This report analysed the mortgage interest deduction, highlighting policy options that Congress may consider.

Mortgage interest deduction

The mortgage interest deduction is of interest to policymakers due to its association with homeownership. The mortgage interest deduction is also of interest because it is one of the largest tax benefits available to homeowners in terms of forgone federal tax revenue.

For FY2024, the Joint Committee on Taxation (JCT) estimates that the deduction will reduce revenues by USD 25.4 billion. The only larger housing-related tax expenditure is the exclusion of capital gains on the sale of a principal residence, which has a revenue cost of USD 38.1 billion for FY 2024.

This In Focus provides a brief overview of the mortgage interest deduction. P.L. 115-97, often referred to as the Tax Cuts and Jobs Act (TCJA), changed the tax treatment of mortgage interest for tax years 2018 through 2025. Although the mortgage interest deduction is still generally available, the TCJA reduced the maximum mortgage balance eligible for the deduction and restricted the deduction of interest associated with home equity loans.

The TCJA also temporarily increased the standard deduction, which reduced the number of taxpayers who claim itemised deductions generally, including for mortgage interest. After the expiration of temporary TCJA provisions, the JCT estimates that the mortgage interest deduction will reduce revenues by USD 81.3 billion in FY2026 and USD 100.6 billion in FY2027.

Summary of current law 

A taxpayer may claim an itemised deduction for “qualified residence interest,” which includes interest paid on a mortgage secured by a principal residence and a second residence. The amount of interest that is deductible depends on when the mortgage debt was incurred. For mortgage debt incurred on or before December 15, 2017, the deduction is limited to the interest incurred on the first USD 1 million (USD 500,000 for married filing separately) of combined mortgage debt. For mortgage debt incurred after December 15, 2017, the limit is USD 750,000 (USD 375,000 for married filing separately).

If a taxpayer has mortgage debt exceeding the applicable mortgage limit (USD 750,000 or USD 1 million), he or she may still claim a deduction for a percentage of interest paid equal to the applicable mortgage limit divided by the remaining mortgage balance.

For example, a homeowner whose mortgage was originated after 15 December 2017, and has a balance of USD 1 million could deduct 75% (USD 750,000 divided by USD 1 million) of the interest payments.

For purposes of the deduction, mortgage debt includes home equity loans secured by a principal or second residence that are used to buy, build, or substantially improve a taxpayer’s home. Mortgage debt does not include home equity loans when the proceeds are used for purposes unrelated to the property securing the loan.

For example, interest associated with a home equity loan that is used to pay off a credit card balance, go on a vacation, or send a child to college does not qualify for the mortgage interest deduction. The restrictions on the use of home equity loans apply irrespective of when the loan was originated. After 2025, the mortgage interest deduction will revert to the law that existed prior to TCJA.

Comparison to prior law 

Under prior law, a homeowner was allowed an itemised deduction for the interest paid on the first USD 1 million of combined mortgage debt associated with a primary or secondary residence. As with current law, a homeowner could deduct a percentage of interest paid if the mortgage balance exceeded the USD 1 million limit.

Additionally, a homeowner was allowed to deduct the interest on the first USD 100,000 of home equity debt regardless of whether or not the taxpayer incurred the debt to finance costs associated with the home.

For example, under prior law, a homeowner could use a home equity loan to purchase a boat, pay for a child’s college, cover medical costs, or any number of other things not involving the property that secured the loan and still deduct the associated interest.

Impact on homeowners 

The reduced mortgage limits under TCJA decrease the amount of interest that would otherwise be deducted under prior law, though the reduction itself will likely not have a significant impact on the number of homeowners claiming the deduction. However, other changes enacted by TCJA, specifically the near doubling of the standard deduction and the USD 10,000 limit placed on the deduction for state and local income taxes (SALT), are estimated to have reduced the itemization rate generally, and will therefore reduce the number of homeowners claiming the mortgage interest deduction. The most recent data from the Internal Revenue Service show that the overall itemization rate fell from 30.6% in 2017 to 9.2% in 2021.

Because taxpayers must itemise to claim the mortgage interest deduction, fewer homeowners now benefit from the deduction.

The lower itemisation rate and the fact that higher-income homeowners have larger mortgage balances on average means that the benefits of the mortgage interest deduction disproportionately accrue to taxpayers at the upper end of the income distribution, and more disproportionately than under prior law.