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Dr. Kamila Sommer

Board of Governors, FED, USA

Authors: Kamila Sommer and Paul Sullivan

Abstract: This paper studies the impact of the preferential tax treatment of housing, including the mortgage interest deduction, on equilibrium house prices, rents, and homeownership. We build a dynamic model of housing tenure choice that features a realistic progressive tax system in which owner-occupied housing services are tax-exempt, and mortgage interest payments and property taxes are tax deductible. We simulate the effect of various tax reform proposals on the housing market, and find that repealing existing tax deductions causes house prices to decline and also increases the homeownership rate. Our results challenge the widely held view that the mortgage interest tax deduction promotes homeownership.

Full Text:  “Implications of the U.S. tax policy for house prices, rents and homeownership”