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Implications of US Tax Policy for House Prices, Rents, and Homeownership

Kamila Sommer and Paul Sullivan

American Economic Review, 2018, vol. 108, issue 2, 241-74

Abstract: This paper studies the impact of the mortgage interest tax deduction on equilibrium house prices, rents, homeownership, and welfare. We build a dynamic model of the housing market that features a realistic progressive tax system in which owner-occupied housing services are tax-exempt and mortgage interest payments are tax-deductible. We simulate the effect of tax reform on the housing market. Eliminating the mortgage interest deduction causes house prices to decline, increases homeownership, decreases mortgage debt, and improves welfare. Our findings challenge the widely held view that repealing the preferential tax treatment of mortgages would depress homeownership.

JEL-codes: H24 H31 R21 R31 (search for similar items in EconPapers)
Date: 2018
Note: DOI: 10.1257/aer.20141751
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