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State and Local Tax Deduction Changes Could Leave Homeowners Feeling SALTy

Learn More About Who Might Benefit

The purchase of a home impacts your finances in many ways. For example, the National Association of REALTORS (NAR) reports that homeowners have 40 times the wealth of renters, ¹ primarily because each mortgage payment potentially builds equity . Plus, homeowners can benefit from more stable housing payments with fixed-rate mortgages.

Homeownership Can Also Affect Your Tax Situation

The U.S. government incentivizes homeownership in multiple ways, from providing a tax deduction for mortgage interest to subsidizing property tax costs through a deduction for the state and local tax (SALT) you pay, including real estate or property taxes.

In recent years, however, the rules surrounding both the mortgage interest deduction and the SALT deduction have been in flux. As lawmakers consider further reforms, let's take a look at the history of both the mortgage interest deduction and SALT deductions, as well as who is benefiting from both.

History of the Mortgage Interest Deduction

The mortgage interest deduction has existed since the creation of the tax code in the United States ², although the deduction that existed at the time was not specific to mortgage interest. Rather, all forms of interest were tax-deductible under the country's original tax laws. ³

The deduction quickly became an entrenched part of American life, with a narrative developing during World War II (when tax costs were rapidly rising)² that the tax break for mortgage interest encouraged homeownership. ²

The tax code’s mortgage interest deduction became so popular that during large-scale tax reforms in the 1980s, President Reagan declared it off-limits to reformers. He instructed his Treasury Department in 1984 to “preserve that part of the American dream which the home mortgage interest deduction symbolizes.” NAR also launched a campaign to protect the mortgage tax deduction during the 1980s, drumming up further support. ⁴

The resulting Tax Reform Act of 1986 did, in fact, preserve the mortgage interest deduction, even as it removed the deductibility of interest on other personal debt. However, the reform bill limited the deduction for the first time, restricting the amount of mortgage interest that could be deducted and allowing taxpayers to only claim the deduction for a maximum of two homes.⁵

The Tax Cuts and Jobs Act of 2017 (TCJA) imposed further limitations, reducing the eligible amount of mortgage debt with deductible interest from $1 million to $750,000 for loans originated after December 15, 2017. The deductibility of home equity loan interest was also restricted to home equity loans used to buy, build, or substantially improve the taxpayer's home.⁶

History of the SALT Deduction

Like the mortgage interest deduction, the SALT deduction has always been a part of the U.S. tax code. It dates to 1861 when income tax was first enacted and, in fact, was the only deduction included in the original income tax code.⁷

The SALT deduction allows taxpayers to deduct state and local taxes, including real estate taxes, from their federal taxable income. This meant taxpayers were not taxed at the federal level on income that was used to pay state and local government taxes.

The SALT deduction was initially uncapped, but as reforms were made through the years, the Alternative Minimum Tax and the Pease limit (an overall maximum limit on deductions) created an effective cap on the amount of state and local taxes that taxpayers could deduct.⁸

However, there was no direct limit on SALT deductions until the TCJA of 2017. This reform legislation capped the deductible amount to $10,000. The new rule went into effect in 2018 and is scheduled to last through 2025 before it expires, unless it is extended. The decision to impose this limit has proved to be controversial.⁹

How Much Does the Mortgage Interest Deduction Cost the U.S. Government?

The mortgage interest deduction comes at a substantial cost to the U.S. government. The Joint Committee on Taxation (JCT) estimated that the deduction reduced U.S. Treasury revenue collected by an estimated $25.4 billion in 2024 .¹⁰

The costs associated with this deduction are also expected to climb as the $750,000 limit on the deductibility of mortgage interest is slated to expire after 2025. If those limits are not extended, the Joint Committee on Taxation estimates that the mortgage interest deduction will reduce Treasury revenue by $82.3 billion in Fiscal Year 2025, and by $100.6 billion in Fiscal Year 2027.¹⁰

How Much Does the SALT Deduction Cost the U.S. Government?

The SALT Deduction is also a costly one for the government. If the deduction were eliminated entirely, down from its $10,000 limit, the United States Treasury would have collected $30.2 billion more in 2024 and would collect $29.2 billion more in 2025.¹¹

The numbers are even starker if the $10,000 cap is removed, which is slated to occur in 2026. At that time, if the deduction was repealed instead of returning to an uncapped limit, the government would see an estimated $211.2 billion in additional revenue, according to the Tax Foundation.¹¹

Who is Benefiting from the Mortgage Interest Deduction?

Although reforms made by the Tax Cuts and Jobs Act limited full deductibility of mortgage interest to loans under $750,000, the wealthiest Americans still receive the bulk of the benefit from this deduction. That's true, in part, because you must itemize to claim it, and only around 10% of taxpayers itemize.¹²

In 2023, 70.1% of the tax benefits of the mortgage interest deduction went to taxpayers with incomes above $200,000, and taxpayers within this income range accounted for 47% of all filers claiming this deduction.¹⁰

Taxpayers with incomes between $100,000 - $200,000 accounted for another 36.2% of those claiming the deduction and received 23.9% of the tax benefits. By contrast, those making under $50,000 collectively accounted for fewer than 3% of all parties claiming the deduction and received just 0.5% of tax benefits resulting from it.

Who Benefits from the SALT Deduction?

Like the mortgage interest deduction, the SALT deduction primarily benefits higher earners. However, there are also substantial geographic disparities in which Americans take advantage of this deduction, as its benefits are heavily concentrated among wealthier Americans in high-tax locations.

In fact, prior to the TCJA in 2017, the average SALT deduction was above $30,000 in just eight counties in the country, including:

New York County (Manhattan)
Marin County, CA
San Mateo County, CA
Western Connecticut (county-equivalent)
Santa Clara County, CA
Westchester County, NY
San Francisco County, CA
Teton County, WY.

In addition, before the TCJA imposed the $10,000 limit, the nationwide average SALT deduction was an estimated $13,000. However, fewer than ⅓ of all taxpayers who claimed the deduction lived in counties where the average deduction was above $15,000.¹³

Homeowners Should Strive to Purchase a Home That's Affordable, Regardless of the Tax Code

Pending tax reform legislation is likely to once again change the SALT deduction, imposing a higher cap but restricting who is eligible for those upper limits based on income.¹¹ The mortgage interest deduction is also expected to be locked in at current levels.

The changes to both the SALT deduction and the mortgage interest deduction in recent years make clear that homeowners cannot always count on the consistency of tax breaks when considering home affordability.

In other words, if you are buying a home, you should make sure you are able to afford the price regardless of whether you can deduct interest and taxes or not, as there is no guarantee that the tax code will remain the same throughout the duration of your 15 or 30-year home loan.

Freedom Mortgage can help you find affordable mortgage options that fit your budget and allow you to get into the home of your dreams -- with or without Uncle Sam's help. Learn more about how we can assist you in finding a loan that's right for you, maximizes your tax deductions, and keeps your hard-earned money in your wallet.