Who Benefits From Homeowner Tax Preferences?

Abstract

This paper relies on estimates from a microsimulation model to analyze the distributional impacts of the preferential tax treatment of owner-occupied housing by race and income. Compared to other homeowner tax advantages, which are more equally distributed than tax burdens, the mortgage interest deduction is more unequally distributed than tax burdens. Although current tax policy is more progressive than a tenure-neutral tax policy that treats homeowners and renters the same, a tenure-neutral tax policy yields larger reductions in after-tax income inequality. Among median-income households, white households receive a larger share of homeownership tax benefits than Black households, relative to each racial group’s share of the overall tax burden. Residential location explains the largest portion of the racial gap in the imputed rent exclusion, while household income explains the largest portion of the racial gap in the mortgage interest deduction and capital gains tax exclusion.