Jan. 26 marked the start of the 2026 tax filing season, and it’s putting a fresh spotlight on a housing tax break that increasingly looks like a perk for a narrow, affluent slice of homeowners.
The mortgage interest deduction lets filers write off interest on up to $750,000 in mortgage debt—including loans on a second home—but only if they itemize. While the deduction was originally intended as a break for the many, the doubling of the standard deduction in 2017 under the Tax Cuts and Jobs Act unwittingly made this a tax cut for the few.
The Tax Policy Center estimates that in 2024, only 8% of households took advantage of the mortgage interest deduction, and 75% of those households had incomes over $200,000 a year—more than double the national median household income.
Now the pool is set to shrink again. Under the One, Big, Beautiful Bill Act (OBBBA), the the share of filers who itemize is projected to fall to about 14.2%—a drop of nearly 31 million itemizers compared with the current-law baseline, according to the Tax Foundation.
Which sharpens the tension: If far fewer taxpayers can even use this deduction, why should the tax code keep subsidizing mortgage debt on second homes at all?
Analysts say scraping the benefit for second homes could generate between $43 billion and $108 billion in revenue over the next decade, with most of that money coming from the top 1% of earners, according to an analysis by Yale Budget Lab. But it would be far from free money, critics of the proposal warn. Repealing the deduction could also hurt middle-income buyers and destabilize local economies built around second homes.
As lawmakers at every level weigh how to fix a stuck market, here’s what to know about the past, present, and proposed future of the mortgage interest deduction.
What is the mortgage interest deduction?
The mortgage interest deduction (MID) is one of the oldest housing tax breaks on the books. When the original modern tax code was introduced in 1913, taxpayers could deduct interest on nearly any kind of debt, says Evan Liddiard, director of tax policy at the National Association of Realtors®.
That changed with the Tax Reform Act of 1986, which eliminated most personal interest deductions. But Congress carved out an exception for mortgages, preserving the deduction for both primary and second homes.
“Many lawmakers viewed the MID as an incentive for homeownership that added social benefits such as stable communities and wealth building,” explains Liddiard.
Since 1987, lawmakers have imposed new limits on the deduction, but its basic protections have endured. Today, homeowners can deduct interest on up to $750,000 in mortgage debt across one or more homes, so long as they itemize rather than take the standard deduction, and meet basic use requirements.
Homeowners must occupy the home for at least 14 days per year or 10% of the days it’s rented out, whichever is greater. Otherwise, the home is treated as a rental property, and different tax rules apply.
Who uses this tax break—and who doesn’t
Part of the criticism of the MID is that it remains one of the costliest deductions when measured by federal budget impact. For perspective, it’s estimated to cost federal revenues nearly $26 billion in 2025 alone, according to the Joint Committee on Taxation. Meanwhile, former U.S. Rep. Marjorie Taylor Greene’s 2025 proposal to eliminate the capital gains tax on primary home sales would have cost only $6 billion, according to her office’s estimates—a change in tax code that could have helped as many as 1 in 3 homeowners today.
Yet, despite that cost, critics claim that it is used only by the wealthiest homeowners. Households earning more than $150,000 per year represent 64% of the tax filings and 84% of the dollar amount deductions for the MID, according to research from the Bipartisan Policy Center. That’s why its opponents have labeled it as one of the most regressive taxes.
“Higher-income households, many of whom own second homes as vacation properties, benefit the most from the second-home deduction,” says Dennis Shea, executive vice president and chair of BPC’s J. Ronald Terwilliger Center for Housing Policy. “I suspect most voters are unaware of this particular provision of the federal tax code.”
But Liddiard cautions against oversimplification. He points out that the current cap—$750,000 across both a primary and a second home—was designed to create parity between households.
A taxpayer with a single $750,000 mortgage receives the same deduction as someone with two smaller mortgages. That limit “equalizes the tax treatment between those who have just one home and those who might want a second one,” Liddiard explains.
Still, critics argue that such equal treatment doesn’t address the underlying inequity: that many Americans can’t afford even one home, let alone two. And with fewer than 10% of taxpayers itemizing their returns today, the deduction remains invisible to most households, while costing billions in forgone revenue.
Some experts fear repealing it could depress local housing markets
While the second-home mortgage deduction may appear to be low-hanging fruit for reform, experts such as Liddiard warn that eliminating it could have a devastating effect in markets that rely heavily on second-home buyers.
Without the deduction, purchasing a second home would get a great deal harder for middle-income buyers, especially at a time when borrowing costs remain elevated.
“Repealing the MID for these homes would make owning that second home more expensive and thus more difficult to achieve, meaning fewer people would be able to afford to purchase one,” he explains.
A stagnant second-home market can have a devastating effect on local economies, depressing home values and weakening job growth in tourism-dependent communities. A ban on new second homes in Switzerland’s resort towns led to a 15% drop in primary home price growth, a 12% rise in unemployment, and a 26% surge in second-home price growth—a combination that ultimately reinforced wealth inequality rather than reducing it, a 2020 study published in the Journal of Urban Economics found.
There are also edge cases that complicate the picture. Households in transition—such as those relocating for work, caring for family in another state, or carrying two mortgages during a move—could be caught in the crosshairs if second-home deductions are eliminated entirely, rather than restructured.
A bigger shift may be coming for second-home owners
Second homes are coming under increasing scrutiny across the country. Montana’s recent property tax overhaul is just one example. Starting in 2026, second-home owners will be subject to a higher property tax than primary residences, in part to offer property tax relief but also to encourage these homeowners to sell.
Shea says that growing concern over tight inventory and elevated mortgage rates is pushing lawmakers to consider creative solutions like these.
“Policymakers are very aware that there is not enough inventory in the market to meet demand, which has caused home sale prices to escalate,” he explains. “They are also aware that elevated mortgage rates have contributed to a lock-in effect, whereby existing homeowners are unwilling to move because they do not want to take on a new mortgage at a higher rate.”
In that context, eliminating the mortgage interest deduction for second homes could serve a dual purpose: freeing up supply and raising federal revenue.
“I can see a variety of ideas gaining traction in Congress, including the No Tax on Home Sales Act, aimed at incentivizing existing homeowners to sell,” Shea says. “With the federal debt so high, it would be important to find offsets for these initiatives. In this context, the elimination of the deduction for second homes could be viewed as having a stimulative effect on the market while raising federal revenue.”
But others warn the market reaction could cut the other way. As Liddiard points out, repealing the second-home deduction could actually exacerbate a struggling housing market, not relieve it.
“For homeowners (of first and/or second homes) who do itemize, they enjoy a tax benefit for being a homeowner, which reduces the cost and makes owning a home less expensive than renting one,” he says.
That risk isn’t just theoretical, either. As the findings from Switzerland show, similar policies have slowed price growth for primary residences, increased unemployment, and driven up prices for existing second homes—ultimately reinforcing, rather than reducing, housing inequality.
As lawmakers at the local and national level grapple with how to help a struggling housing market, these competing perspectives highlight the central tension: Before we can fix the housing market, we may first need to agree on what, exactly, it’s supposed to do—and who it’s supposed to serve.