Limiting the Mortgage Interest Deduction by Size of Home: Effects on the User Cost and Price of Housing Across Metropolitan Areas

Andrew Hanson

Journal of Housing Research, 2014, vol. 23, issue 1, 1-20

Abstract: In this paper, I examine the user cost and home price implications of limiting the federal mortgage interest deduction (MID) based on the square footage of a home. I extend the standard user cost model to include a square footage-based cap on the tax-favored status of mortgage interest. I compare two policy alternatives: one that limits the marginal deduction based on home size, and another that removes the deduction on the home based on home size. There is substantial variation across metropolitan areas in both the number of homes exposed to each type of cap, the user cost increase, and the resulting expected price declines.

Date: 2014
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DOI: 10.1080/10835547.2013.12092080

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