On Real Time with Bill Maher recently, Andrew Sullivan was raising the issue of home ownership and lamenting the fact that there is special preference for buying homes in the tax law. Why discourage renting?

This issue is personal to me because I once did some home repairs and paid for it on my credit card. When tax time came around, my tax preparer said I couldn't deduct the credit card interest because the borrowed money wasn't secured against my house. By contrast, as I understand it, if someone takes a loan against their house to buy something unrelated to their house—a boat, let's say—interest on that loan would be deductible because it is secured against the home. (If you're a tax preparer and dispute these claims, please let me know!)

The law is presumably intended to encourage or otherwise subsidize home ownership. There's just one problem: That's not the effect. Advertisers pepper the airwaves—cablewaves?—with ads urging “Tap the equity of your home!” Of course, as the verb “tap” implies, the end result is decreased equity in one's home, not increased equity. And yet the tax laws are encouraging such behavior by creating the tax incentive. So Uncle Sam will help buy that boat, but won't help with my (unsecured) home repair.

Buying a house can be a big risk for many people. People who like to advise home purchasing as a no-brainer are usually just comparing a rental cost to a mortgage payment. But there can be hidden costs lurking all over the place—the so-called “money pit” effect. Repairs might need to be done, property tax rates might change, or one might have to sell the house at an inopportune time. Plus it takesa a long time before you really have any equity in the house; for a while, most of your mortgage payment is going to interest.

In the modern world, jobs put a serious wrinkle in things, too. Long ago, people had careers with a particular employer that employed them for their entire life, so it made sense to buy a home near work and stay thee. Today, jobs change a lot, companies don't last, layoffs happen, and people have to trade up from one job to another to get ahead. There's no guarantee a new job will be near home, so that either means driving a lot—which is getting increasingly expensive—or moving. Unfortunately, if you have to move, and especially if you don't have a choice about the timing, you can lose a lot on your house right there.

And then there's the issue of income. It's very hard to predict that income will stay constant over a long time. When renting, one usually leases for a year. After the year, if there's a need to move to a cheaper place, that's often easy to do. By contrast, with a mortgage on a home, it's hard to suddenly decide to suddenly cut back on the expense of that mortgage payment.

Of course, there's the asset value of the house once one nears retirement. But you don't know you're going to be able to rely on that until you get there, so that's a gamble, too. Even if you do have the asset, it can be whittled away by maintenance costs, property taxes, or the need to borrow against the house for other reasons.

So, given all that, why should the government be encouraging us to undertake a practice that has so many ways to work against our best interest? Why not just tell people it's ok (and sometimes preferable) to rent? Then people could make the choice based on a proper analysis of risks and benefits, without being biased by a tax deduction attached to one choice but not another.

The government doesn't need to get rid of the home mortgage deduction. They could just add a corresponding rental deduction.

But I'd get rid of any deduction for interest paid on credit cards secured against one's house. If the money isn't going into the asset value of the house, there should be no deduction; and if it is, it shouldn't matter if it's secured or not.

If you found this post useful, please don't forget to "rate" it.