How the Tax Code Subsidizes Millionaires’ Mansions

Facebook CEO Mark Zuckerberg, right, and Andrew Houston, founder and chief executive of Dropbox, wait in a car in Sun Valley, Idaho.

Photo by Kevork Djansezian/Getty Images.

Mark Zuckerberg recently refinanced the $5.59 million mortgage on his house to a 30-year adjustable rate loan with an introductory rate of 1.05 percent.

Some of that is simply today’s low-rate environment. Some of it is Zuckerberg’s willingness to take on interest-rate risk by going with an adjustable-rate mortgage. But some of it is that you can get loans on more generous terms if you’re rich and don’t really need the loan. That seems unfair, but it reflects the fact that the less you need to borrow money to afford a house, the less likely it is you’ll default on your loan. But of course that raises the question of why you would want the loan in the first place if you’re as rich as Zuckerberg.

Bloomberg writes that “wealthy individuals often choose to finance a home purchase rather than pay cash because of the overall low cost of mortgage debt and the additional access to liquidity,” which is true but I think only scratches the surface. Another important issue is that interest payments are tax deductible, which is a very big deal if you have a very high income and live in a high-tax state like California. That of course raises the question of why we do this as a matter of public policy. The deductibility of mortgage interest is often described as a “middle class” tax break, and it’s of course true that middle-class people use it. But richer people have more expensive houses and pay higher tax rates, so the scale of the benefit is much larger to rich people. What’s more, in supply-constrained environments like the Bay Area, subsidizing Zuckerberg’s home buying largely serves to push up the price of housing for everyone else.