History

• When the federal government first made interest deductible for individuals, the benefit applied for all types of interest, whether from the mortgage on a home or a personal loan. The rationale for excluding an individual's interest payments from taxes was similar to that for business expenses. Taxes applied only to net income, that amount remaining after subtracting expenses from revenues. Many years ago lawmakers removed from the tax code any deductions for interest from debts other than home mortgages.
  
  

Tax Law

• The IRS recognized two types of mortgage interest. The first is home acquisition debt and it includes all costs associated with financing the purchase of a home. The second type is home equity debt and it comes from second mortgages and home equity lines of credit. Home equity debt is not necessarily used directly on the home, it can be spent on vacations or any other expense. The IRS treats these types of debt somewhat differently, but in most cases they are both fully deductible. The deductible interest can be from a primary residence or a second home.
  
  

Benefits

• The prevailing thought is that the home mortgage interest deduction is desirable since it encourages home ownership. The middle class supposedly benefits as does the society as a whole by increasing home ownership. The reality is that only a relatively small number of taxpayers take full advantage of this tax break. Most don't have enough other deductible expenses to make itemizing their deductions worthwhile, so they opt for the standard deduction. The benefit most often goes to upper middle class and higher income taxpayers, most of whom would own their homes anyway.
  
  

Cost

• The federal government loses about 100 billion dollars a year from lost taxes for the mortgage interest subsidy. This is roughly the size of the enormous and controversial TARP payments of 2008.
  
  

Curtailment

• There have been many attempts over the years to limit or eliminate the deduction but all have met with strong opposition. President Obama has proposed eliminating the deduction for taxpayers making more than $250,000 a year. Although this would affect only two percent of taxpayers, it drew strong criticism from many quarters, and probably has little chance of being enacted.