This passage caught my eye from the WSJ’s recent editorial on the deficit commission:
The chairmen are on better ground arguing for fundamental tax reform that would swap lower rates for fewer loopholes and “tax expenditures.” On the latter, the draft is right to put the mortgage interest deduction on the table, as taboo as that is in Washington. If we’ve learned anything from the last decade, it ought to be that our many housing subsidies have led to a misallocation of capital with few benefits. Canada has no such deduction but a higher rate of home ownership.
What the WSJ doesn’t tell you is that (with some fairly sensible exceptions) any capital gains on the sale of a principal private residence in Canada is, as it is in very many other western countries, tax-free. In the United States, a country burdened with (1) a tax regime that is extraordinarily hostile to saving and (2) a political class that wonders why people do not save, capital gains above a certain limit on the sale of a primary residence will be taxable (without any compensation even for inflation, a relevant consideration for any asset class, but particularly one where ownership may stretch out over decades), a fact that is all too rarely mentioned by those who would scrap the mortgage interest deduction. Adding injury to injury, any capital losses on the disposal of a primary residence are ignored by the IRS.
The answer is probably a gradual reduction in the mortgage interest deduction (anything more rapid would be yet another devastating blow to the housing market), and a scrapping of any capital gains liability on a principal private residence held for more than a year or so.