Congress is urged to implement mortgage tax credits

Congress is under pressure to adopt a mortgage interest credit (MIC) that would offer greater tax relief for homeowners.

The Community Home Lenders of America (CHLA) "aggressively advocated" for this policy seven years ago and is now calling on lawmakers to revisit it.

This would be substantially different from the mortgage interest deductions in force right now because MIC would allow interest payments to be offset against tax liability, directly reducing what's owed.

By contrast, MIDs currently see interest payments deducted from taxable income, which has less of an impact.

According to the CHLA, the Tax Cuts and Jobs Act, signed into law in 2017 by then president Donald Trump, blunted the impact of mortgage interest deductions further.

The TCJA meant MIDs only applied to mortgage balances of $750,000, compared with $1 million before.

Other measures brought in through this act, such as a cap on maximum state and local tax deductions," all but eliminated tax benefits for properties on a home."

The CHLA pointed to figures that showed the impact this had on American homeowners.

While the annual tax benefit value from mortgage interest deductions stood at about $64.6 billion in 2017, this had fallen to just $31 billion in 2023.

Estimates from the Joint Committee on Taxation in Congress suggest that, if the TCJA had not been adopted, deductions would have exceeded $100 billion this year.

These provisions are now due to expire in 2025—and with interest rates elevated, the CHLA says now is the time to introduce a mortgage interest credit instead.

Tailored policies

The CHLA has stressed that it isn't necessarily calling for MIC to be rolled out across the board. According to the association, MIC could be targeted specifically toward first-time buyers or based on gross income.

Last November, the Bipartisan Policy Center said the mortgage interest deduction "warrants scrutiny" and remains one of the costliest tax expenditures in the federal government.

That will only increase when the TCJA provisions expire, meaning the maximum value of mortgage debt eligible for MID returns to $1 million.

By its estimates, the budgetary effect would increase from $32.2 billion in 2025 to $84.1 billion in 2026.

Research suggests MID disproportionately benefits higher-income thresholds—and by contrast, MIC could be beneficial to all households.

Just 3.6% of those who claim mortgage interest deductions earn under $50,000 a year. By contrast, 76.1% are on incomes of more than $100,000.

The Bipartisan Policy Center went on to warn that the effectiveness of a mortgage tax credit would depend on several factors, including:

• The percentage of interest that can be claimed

• Whether the tax credit is refundable or non-refundable

• Whether there's a cap on the size of the home loan

• Whether second homes are also eligible

One proposed policy, which involves replacing MID with a 15% non-refundable tax credit, could potentially increase federal revenue by $100 billion within a decade.

According to policymakers, part of that cash could then be used to ramp up housebuilding.

"In a budget-constrained environment, lawmakers should question whether the existing MID is the most equitable, effective, and fiscally responsible way to support homeowners," the Bipartisan Policy Center concluded.