The Mortgage Interest Deduction: Options for Reform

The mortgage interest deduction (MID) is one of the largest federal tax subsidies for housing, but its benefits are unevenly distributed. Most of the deduction’s value accrues to higher-income households who can afford to buy a home independent of tax policy, and evidence suggests it does little to promote homeownership in the aggregate. The MID is costly from a budgetary perspective: the Joint Committee on Taxation (JCT) estimates the MID lowers revenues by about $25 billion in recent years. This cost will exceed $100 billion annually in the coming years if the Tax Cuts and Jobs Act (TCJA) expires at the end of 2025, because the TCJA temporarily limited the benefits of the MID.

This report evaluates four reform options ranging from modest to comprehensive: limiting the deduction to primary residences only, capping deductible interest at $20,000 or $10,000 annually, and full repeal. We present revenue estimates under both current law and potential TCJA extension scenarios to inform policymakers considering these options in different legislative contexts. Additionally, we examine how reforms to the state and local tax (SALT) deduction would interact with MID policy, demonstrating that seemingly unrelated tax provisions can significantly amplify or diminish the mortgage interest subsidy.

The mortgage interest deduction has transformed dramatically since its origins over a century ago. Initially, it was not designed as a homeownership incentive but emerged from a broader business-oriented tax policy. Because most businesses were family-owned, business's cash flows were often intertwined with that of the household, so allowing a deduction for all interest paid was a simple way to define net income for purposes of taxation across different types of taxpayers.

Until the 1986 Tax Reform Act, individuals could deduct interest payments on virtually any type of debt, including car loans, credit cards, and mortgages. This comprehensive interest deduction was part of the tax code's general treatment of borrowing costs rather than a targeted housing policy. But the 1986 reform fundamentally restructured these provisions, eliminating deductions for interest on consumer debt like credit cards and car loans while preserving the mortgage interest deduction. This converted the tax code's broad-based interest deduction, which does not favor any specify activity among debt-financed spending, to a narrow tax subsidy that applies specifically to certain taxpayers, creating horizontal inequities within the tax code.

The 2017 Tax Cuts and Jobs Act (TCJA) introduced the most significant changes to the MID since 1986. The legislation reduced the home acquisition debt limit from $1 million to $750,000 for mortgages originated after December 15, 2017, and eliminated the deduction for home equity loan interest entirely. However, like most individual tax provisions in the TCJA, these changes are temporary and will expire at the end of 2025, reverting to pre-2017 limits.

The TCJA's impact on MID utilization was profound, though largely indirect. By nearly doubling the standard deduction and placing restrictions on other itemized deductions, the law dramatically reduced the number of taxpayers who itemize their returns—a prerequisite for claiming the mortgage interest deduction. Itemization rates dropped substantially after enactment, with corresponding decreases in MID claims. In 2017, 87% of mortgage interest paid was reported on tax returns, but this fell to just about 50%in 2018.¹ The number of returns claiming the MID declined by59%, while the total amount claimed dropped by 40%. The estimated cost of the deduction, measured as forgone revenue, fell from $66.4 billion in 2017 to $33.7 billion in 2018.² Still, the MID ranks as one of the largest tax expenditures in the U.S. even after this reduction.

This reduction achieved one of the TCJA's stated goals—tax simplification—by moving millions of taxpayers from itemizing to taking the standard deduction. (The Budget Lab estimates that TCJA reduced the time burden of filing taxes by about 10 percent). However, the TCJA also had the effect of concentrating the remaining MID benefits among higher-income households, as they are more likely to have mortgage balances and other deductions large enough to make itemizing worthwhile. Returns with less than $200,000 in Adjusted Gross Income (AGI) accounted for almost 92% of the decline in the number of returns with MID and 93% of the drop in amount claimed from 2017 to 2018.

According to a Joint Committee on Taxation (JCT) report, in 2024, taxpayers who earned more than $200,000 in AGI represented 49% of all mortgage interest deduction claimants but captured a disproportionate 71% of the total tax expenditure benefit.³ This concentration occurs because higher-income homeowners typically have larger mortgage balances, face higher marginal tax rates that amplify the value of deductions, and are more likely to itemize their returns.

Currently, a common justification for the MID is that it encourages homeownership by reducing the after-tax cost of borrowing to purchase a home. Proponents argue that widespread homeownership creates more stable communities, builds household wealth, and provides families with housing security.

But research on the MID has largely not supported the homeownership justification. Studies consistently find that the mortgage interest deduction does little to actually increase homeownership rates because it fails to address the main barriers to homeownership—down payments and closing costs. Instead, the deduction primarily benefits those who would buy homes anyway, potentially inflating home prices as the tax benefit gets capitalized into property values.⁴

In this section, we estimate the revenue potential of reform options limiting the tax benefit of the MID. We organize reforms from least to most restrictive:

1. Limitation to primary residences only
2. $20,000 limitation on total interest deductible
3. $10,000 limitation on total interest deductible
4. Full repeal

We begin with estimates against a standard current-law baseline, under which the individual provisions of the TCJA expired as scheduled. But because negotiations to extend TCJA’s expiring provisions are ongoing at the time of this writing, and because the effects of MID reform options depend critically on what happens with those expiring provisions, we also examine effects in the context of TCJA extension in another section below. Table 1 summarizes our estimates.

TCJA Extension

As described above, the budgetary and distributional impacts of the mortgage interest deduction depend on the broader tax code—namely how other itemized deductions are structured and how large the standard deduction is. This means that the estimates presented above apply only to the current-law scenario where all of TCJA’s expiring provisions indeed expire as scheduled at the end of this year. The Budget Lab, like official government scorekeepers, uses a current law baseline when evaluating budget proposals.⁵

But if Congress extends those provisions, the impact of any changes to the mortgage interest deduction would be different. The House of Representatives has passed legislation, the One Big Beautiful Bill Act (“OBBBA”), that would extend the TJCA’s expiring individual tax provisions; the Senate is now considering a version of this legislation.

For that reason, we also present estimates of our MID reform options evaluated in the context of TCJA extension, shown in Table 2. Because the TCJA already limits the mortgage interest deduction directly and indirectly, reform options raise less revenue in this context. The distributional impact is generally more progressive, since a more narrow, higher-income subset of filers deduct mortgage interest under the TCJA relative to the current law pre-TCJA tax code for 2026.