The Effects of Inflation and Taxes on the Costs of Home Ownership

This article assesses the impact of inflation on the true economic costs of owning a home. Using the assumption that most pre-tax housing costs are roughly proportionate to house value, it is shown that inflation cuts housing costs substantially for homeowners with mortgages because capital gains income from house price inflation is untaxed but mortgage interest payments are fully deductible. The distribution of tax savings are estimated with national data and it is found that roughly half of all benefits go to families in the top one seventh of the income distribution.