The Home Mortgage Interest Deduction

How did the home interest deduction come about?

The First Income Tax - In 1894 Congress passed the first income tax, which was challenged and later struck down by the Supreme Court. So, government got into gear and in 1913 the Sixteenth Amendment was ratified granting Congress the power "to lay and collect taxes on incomes, from whatever source derived."

The Second Income Tax - Congress quickly imposed an income tax starting at 1% and rising to 7% on incomes over $500,000. This resulted with less than 1% of the US population paying any income taxes. This was the beginning of the modern graduated income tax.

Enter The Tax Deduction - The tax was offset with a deduction of any interest paid. Rental income was offset by the interest paid to finance the rental property and interest became a tax deduction.

Prior to WWI, home owners typically owned their homes outright. With the exception of financed or leased farm land, homes were purchased with cash. So at first, the mortgage interest deduction did not benefit home ownership.

Soon, local Thrift & Loans (Savings & Loans) were created to provide access to home financing. Subsequently, programs through the FHA, VA, and latter Fannie May and Freddie Mac facilitated broader home ownership.

Finally, the creation of the conventional loan and the mortgage back security market brought financing to the masses. Along with home ownership came the mortgage interest deduction.

Bottom Line: The home mortgage interest deduction is a carry-over from the original income tax and business interest rate deduction of a century ago. It was not intended to encourage home ownership or considered a public policy. Today, the Washington is eyeing the home mortgage interest deduction (the removal of the exemption) as a possible source of revenue. "The government giveth and the government taketh away."