This paper presents new evidence on the impact of the preferential treatment of owner-occupied housing in Europe. We find that tax benefits to homeowners reduce the user cost of housing capital by almost 40 percent compared to the efficient level under neutral taxation. On average, the tax subsidy translates into an excess consumption of housing services equivalent to 7.8 percent of the value of owner-occupied housing, or about 30 percent of financial asset holdings in household portfolios. The bulk of the subsidies stems from under-taxation of the return to home equity, while the average contribution of the tax rebate for mortgage interest payments is driven down by relatively low loan-to-value ratios in the data. However, at the margin, the tax–induced incentive to use mortgage debt to finance the purchase of the main residence is sizable. Considerable attention has been devoted to housing markets since the crisis has uncovered the macroeconomic risks created by property market bubbles and high household debt. Among the structural and institutional factors affecting residential real estate, the preferential tax treatment of owner-occupied housing is a source of major concern, in terms of incentives for housing and mortgage debt choices. This paper evaluates the size of the preferential tax treatment of owner-occupied housing in the euro area borrowing the analytical framework of Rosen (1979, 1985), based on the user cost of capital – a normalized measure that estimates the annual tax-adjusted cost of owning and operating the main residence per additional euro invested in housing capital. Specifically, we simulate household-specific tax-induced subsidies to the user cost using the first wave of the Household Finance and Consumption Survey (HFCS), matched with the tax provisions relevant to owner-occupiers in the different countries.