Here's a reader letter that could start a new Civil War, only this time it would be Mid-America against the East and West coasts. It could also be real class warfare---the middle class against the upper middle class and deeply affluent.

LM from Houston asks, "Is it fair that the average homeowner in 'flyover country' receives no benefits from home mortgage interest and property taxes while our wealthy neighbors in River Oaks and those who live on the two coasts can write thousands of dollars off their taxes each year?

"To my way of thinking, I am subsidizing wealthy homeowners in Texas and folks in places like LA, San Francisco, and Boston. Every dollar they write off their federal income tax has to be replaced, and homeowners like me are paying for it.

"I receive no tax benefit (from home ownership). I live in a standard 2,000 square foot tract house that's perfectly nice, but because the home prices in Houston aren't outrageous and the personal property taxes are (so far) relatively reasonable, we fall way below the standard deduction.

"I want to see this unfair subsidy ended. I think if other homeowners in "flyover country" were aware of this subsidy they are paying for, they would be as outraged as I am."

L.M. has touched on our most treasured tax deductions. It is sure to be defended by real estate agents who love to sell the tax break, even when it doesn't work. It will be deemed life support by debt-beleaguered homeowners in the high cost/high tax urban areas on the coasts. And we're not even counting the millions who somehow think it's worthwhile to spend $1 on interest to save 25 cents on taxes.

In fact, LM is right on. The deductions for home mortgage interest and real estate taxes are subsidies from middle-income families to those with more income. They are also subsidies from low cost housing areas to high cost housing areas.

Here's the math. The standard deduction on a joint return for 2004 is $9,700. Only itemized deductions greater than that amount count for reducing your income tax bill. While we talk a great deal about tax deductions, millions of households don't itemize. Most households have only four items to deduct: mortgage interest, real estate taxes, charitable contributions, and state income taxes.

The first two items loom large in most itemized returns. According to one set of estimates, for instance, the "tax expenditures" (tax revenue foregone because of deductions) for mortgage interest and real estate taxes were $87.9 billion in 2002. The tax expenditures for charitable deductions and other state and local taxes were $30.0 billion and $44.9 billion, respectively.

Right now, if you buy the median priced home in dozens of mid-America cities, your tax deductions from ownership won't exceed the standard deduction. (Readers can check this by visiting my website ( and using the Homeownership Tax Benefits Calculator.) Ownership deductions will only cut your tax bill if your other deductions take you up to the $9,700 standard deduction ($4,850 single, $7,150 head of household).

If you buy a $140,000 house with a 20 percent down payment, for instance, you'll enjoy no tax benefits. Only when you get to around $170,000 do tax benefits start to appear.

This means there are virtually no tax benefits to home ownership if you buy the median priced home in Atlanta ($156,800), Kansas City ($152,100), Boise City ($151,500), Des Moines ($141,800), Dallas ($141,000), Grand Rapids ($134,500), Knoxville ($131,400), Saint Louis ($128,800), Indianapolis ($125,900), Fargo ($124,200), Dayton ($119,700), Pittsburgh ($116,300), Tulsa ($113,300), Rochester ($105,100), Peoria ($98,400), or Southbend ($93,800)--- not to mention 65 Mid-America cities tracked by the National Association of Realtors where the median home is priced below $170,000.

At the high end of the home price scale, the tax benefits are substantial. In Los Angeles, where the median home price is $438,400, a homeowner in the 25 percent tax bracket would enjoy tax benefits for about 19 years. The benefits would amount to nearly 10 percent of the home's original purchase price. In fact, the actual benefit would be higher because most buyers would be in a higher federal tax bracket. They would also have the state income tax to increase the value of their ownership deductions.

Now, can you guess where the big tax-free home appreciation is?

It's not in Nebraska. It's not in Ohio, Iowa, Indiana, Illinois, Kansas, or Missouri. It's certainly not in Texas. It's not anywhere in mid America.

The Office of Federal Housing Enterprise Oversight maintains price indices for different areas in the country. While the broad U.S. index appreciated 41.7 percent in the five years ending March 31, houses in the Pacific states rose 62.6 percent, houses in the New England states rose 67.8 percent, and houses in the Middle Atlantic States rose 51.4 percent.

In mid America, however, appreciation was well below average, ranging from 20 to 30 percent over the last five years.

Does this mean the tax subsidy for expensive housing is causing coastal prices to rise? I doubt it. Other factors are at work.

What it does mean is that a good idea--- encourage home ownership with tax deductions--- is no longer working. Instead, home ownership deductions have become the two-martini lunch of the upper middle class.

On the web:

Check NAR median home prices

Check the Office of Federal Housing Enterprise Oversight State and Area price indices

The Home Ownership Tax Benefits Calculator