The Tax Treatment of Mortgage Investment

This paper examines the theoretical and empirical justifications for replacing the special bad-debt reserve deduction currently accorded to thrifts under federal tax law with a mortgage interest tax credit. It presents the background to the recommendations of the President's Commission on Housing that such a change be employed as a short-term tax incentive to mortgage investment and compares a system in which all mortgage investors received the bad-debt deduction with one in which all receive a tax credit. The conclusion is that the credit is superior to the deduction on theoretical grounds although it is difficult to predict with certainty the impacts of such a change in tax policy on total mortgage investment.