What's Wrong With Deducting Mortgage Interest?

Posted by Mike Michalski on Monday, December 26th, 2016.

A simple question, really.  But how many people know that, while we allow a mortgage interest deduction here in the United States on up to $1 million of mortgage debt, our neighbor to the north, Canada, does not?

The answer may be that Canada thought it through and decided that the better policy was to exempt all home equity instead of rewarding the accumulation of debt. 

So they don't have a mortgage interest deduction.  Instead, they've eliminated all taxes on capital gains when a home is sold.  We do that here, too, but only in a limited fashion with only the first $250,000 of gains escaping taxation for single individuals ($500,000 for married couples).  In Canada, this exemption isn't capped, a recognition that the home provides basic shelter and a nest egg for the future.

The result?  Canada's home ownership rate was at 67.6% in 2013 (the most recent year for which this statistic is available) while, in the US, home ownership has been steadily dropping for 12 years, hitting a low of 62.9% in the 2nd quarter of 2016 before bouncing up slightly (to 63.5%) in the 3rd quarter.

And the number of mortgages in arrears is nearly eight times lower in Canada than in the US.

Some would argue that Canada's approach to home ownership is preferable because it is fueled by equity rather than debt.  Most important, the Canadian policy rewards families for building up the equity in their homes rather than accumulating debt.  And the tax benefit arrives precisely when it is most valuable: at the end of a person's working life when he or she is contemplating downsizing for retirement.

However, the mortgage interest deduction is so firmly entrenched in the current financial planning of families in the US that it is hard to see such a dramatic change being implemented overnight, if at all.  But we'll see how all this plays out in 2017 with the new administration's tax simplification proposals.

This entry was posted under South Bay Real Estate News, and Taxes.