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In Australia, if you have a mortgage on the house you live in the interest and other expenses are not tax deductible, unless you rent out one or some of the rooms or run a business from your home, in which case only a portion of the interest and other expenses will be tax deductible. Similarly you don't pay any capital gains tax on selling the home if it is your primary place of residence and you have not earned any income from it.

What are the reasons (tax and legal) for interest being tax deductible on a house you live in in the USA without the house earning you any income? And similarly why is capital gains tax payable on the sale of such a property in the USA?

I have always wondered why this is the case in the USA, because in Australia the tax laws state that unless an asset produces an income, you cannot claim a tax deduction on the interest and expenses incurred in maintaining that asset. Also, our primary place of residence is exempt from any capital gains tax on the sale of the home.

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  • A lot of that tax break, though, is offset by much larger interest rates US people pay on their mortgages. If you compare interest rates on mortgages in the US, even now that are quite low by historical standards, they can easily be 4-5%. That is huge is compared to the 2% you can get in many European countries. As usual in the US, the tax break goes to help banks, not individual, the answer that the US is socialist is BS.
    – user
    Feb 19, 2018 at 1:17
  • @user you may want to read this: money.stackexchange.com/a/156633/2998
    – littleadv
    Apr 25 at 16:58

3 Answers 3

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Taxes are a tool for achieving social policy goals. While Americans consider "Socialism" to be a curse, the US is in fact quite socialistic. Mostly towards corporations, but sometimes even the normal people, not only the "Corporation are people, my friend" (M. Romney) get some discounts.

The tax deduction on mortgage interest comes as a tool to encourage Americans to own their homes. It is important, socially, for people to own their home to be independent, and in general contributes to the stability of the society. As anything, when taken to the extreme, it in fact achieves exactly the opposite, as we've seen in 2008, but when balanced - works well.

Capital gain is taxed in the US, because it is income. Generally, any income is taxed. However, gain sourced from the sale of primary residence is excluded, up to a certain (quite large) amount from this tax (if lived in the residence long enough - 3 of the last 5 years prior to sale). This, again, to encourage Americans to upgrade their houses and make it easier for Americans to relocate when needed (sell one house and buy another without losing cash on taxes).

As to "asset producing income" - that is true in the US as well. You cannot deduct your personal expenses, in general. Mortgage interest on primary residence is a notable exception, because it serves a social cause. Similarly, medical expenses are allowed as a deduction, if they're above certain limit, and many other things (for example - if a US person totals his car, and insurance doesn't cover the loss - it is tax deductible, above certain limit, the higher the income - the higher the limit). These are purely social policy breaks. Socialism, something Americans like to have, and love to hate.

Many "anti-socialists" in the US are in fact taking advantage of these specific tax breaks the most, because for rich folks these are limited or non-existent (mortgage interest limited up to 1 million, medical expenses are allowed only above certain percentage of income, etc).

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    Revised comment: Capital losses from the sale of a personal residence (which some people experienced in the last few years) are not deductible against other capital gains or income.
    – Dilip Sarwate
    Oct 3, 2012 at 20:58
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    Tax policies to promote social goals are hardly socialism.
    – Jeremy Stein
    Oct 5, 2012 at 13:52
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    @Jeremy, what Americans see as "Socialism" and what Socialism really is are two distinct and unrelated things. Providing social safety net and encouraging population to improve its situation through tax policies is exactly what socialism is about.
    – littleadv
    Oct 5, 2012 at 17:07
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    "what Americans see as "Socialism" and what Socialism really is are two distinct and unrelated things" So, the meaning of words is some Platonic ideal separate from how people actually use the words? All the dictionaries are just wrong about what the word "socialism" means?
    – Acccumulation
    Sep 15, 2017 at 1:33
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    @Acccumulation just read any non-US source about socialism and then read something from Republicans. The overlap is coincidental at best. Due to the Red Scare propaganda campaign, anything and everything bad is socialism and socialism is just a stand-in for "evil" in some american political circles
    – Hobbamok
    Apr 24 at 10:43
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Well quite a few countires have tax breaks on the first house you own ... this is typically to promote people to have atleast one house of their own ... having a house of your own provides lot more stability in the long run ... and without tax breaks it makes it difficult for quite a few to own a house ... the tax breaks form a motiviation as well ...

There are at times other effects of this breaks, people buying houses beyond their need [bigger house than required] or capacity [buying in a central / expensive location] by maximizing the breaks ...

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  • Is it only for the first house you buy and not for subsequent houses? In Australia we have the First Home Owner's Grant, $7,000. During the GFC it was increased to $14,000 on existing houses and $21,000 for newly built houses.
    – Victor
    Oct 3, 2012 at 4:18
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    @Victor there was a first time home buyer tax credit during the peak of the crisis (2008-2010), and in some states they have their own credits. This is unrelated. Mortgage interest is always deductible, if the mortgage is used to purchase or significantly improve your primary residence.
    – littleadv
    Oct 3, 2012 at 7:12
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It's a scam pushed through to benefit the banking system. Tax payments become income for the banks. Any alleged benefits for property holders are ultimately reduced by increased property prices, capital gains tax and estate taxes

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  • You have no idea do you?
    – Victor
    Sep 16, 2017 at 7:53

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