A coveted tax break is on the table
The Obama administration’s budget threatens to cut a benefit many Americans view as practically a right -- the mortgage interest tax deduction -- and powerful real estate interests are fighting back.
The move would affect only households earning $250,000 or more, but opponents say it could prolong the housing crisis by slowing already torpid home sales and deal another blow to home values ravaged by the market crash.
“Even though the intended impact is on the top 2% of households, the unintended consequence will be a reduction in home values for homeowners across the country,” said Lawrence Yun, chief economist for the National Assn. of Realtors.
The Realtors group contends that the loss of the tax break will lead high-income home-buyers to spend less on homes, which would eventually drive down prices at the high end. And if mansions cost less, modest bungalows will ultimately see their values fall as well, Yun contends.
The odds of that happening may be greater in California, where about 500,000 taxpayers who claim the mortgage interest deduction earn enough to be affected by the proposed cut, the Realtors group says.
The National Assn. of Home Builders and the Mortgage Bankers Assn. were also quick to oppose the Obama proposal.
The president’s budget plan doesn’t target the mortgage interest deduction directly; instead, it caps the rate of all itemized tax deductions for the wealthy.
Under the budget plan, households now subject to 33% and 35% rates would be able to claim deductions only at a 28% rate. So for every $1,000 in deductions, a top-bracket household would save $280 in taxes, down from $350.
Current law eliminates the deduction for mortgages of $1 million or more, and that limit would remain. If approved by Congress, the new rules would go into effect in 2011.
Richard Green, director of USC’s Lusk Center for Real Estate, said the Obama proposal -- which he supports -- may well be “sort of the nose under the tent on the way to getting rid of the mortgage interest deduction entirely.”
In the U.S., the home mortgage write-off is used by about 35% of taxpayers who itemize their deductions, generally a more affluent group. Roughly 90% of taxpayers who earn more than $100,000 itemize deductions, while about 18% of those earning less than $50,000 do so, according to the Tax Foundation, a nonpartisan educational group.
A Realtors association analysis of Internal Revenue Service data found high-income taxpayers who claim the mortgage interest deduction comprise about 2% of tax filers. But a disproportionate number -- about one sixth -- are in California.
The half-million Californians who would be affected by the Obama tax change are by far the largest total of any state. New York is in second place with about 250,000 high-income filers who claim the mortgage interest deduction, the Realtors’ analysis shows.
“This is aimed at California and New York,” said UC Berkeley economist Kenneth Rosen, who has studied the interest deduction. “The problem with this is households earning more than $250,000 in New York or California may not be what we call wealthy.”
For those families, the extra few hundred dollars a month in taxes could be painful, Rosen said. A better way to trim the deduction, Rosen said, would be to index it regionally based on home values. That would allow more people in high-cost areas to still get a deduction.
The heavy hit on California is also why Bob Gartland, 51, said he is against the proposed deduction cut. A consultant to the consumer electronics industry who said he voted for Obama, Gartland just bought a $4-million home in Manhattan Beach and said he borrowed just under $1 million solely to get the tax deduction.
Gartland said reducing the deduction wouldn’t have a dramatic effect on his life. But he contends that in high-priced areas such as Southern California, a $250,000 household income doesn’t quite make you rich.
“I have many friends making $250,000,” he said. “The husband and wife both work. They live in a middle-class house and go out to dinner twice a month because that’s what they can afford.”
Millions of Californians who are not in the top income brackets also claim the deduction. The Realtors’ study found that more than 5 million in California claim the mortgage interest deduction, about 10 times the number of wealthy filers doing so.
In high-cost markets like California, first-time home-buyers often reduce the amount of taxes withheld from their paychecks -- knowing that they will be able to write off much of their mortgage interest payments on their income taxes.
That’s why even those who are open to eliminating the deduction, like Green, say it should be reduced gradually over several years.
Fear that the Obama proposal could lead to future cuts to the deduction is a major concern of some opponents, said David Kissinger, director of government affairs for the South Bay Assn. of Realtors.
“If today it’s households earning $250,000 who will pay more, does it mean tomorrow if they still need to balance the budget it will be those making $180,000, then $160,000? How often is the government going to go back to the well?” he said.
News of the possible reduction in the tax break has shocked some Americans raised on the notion that a home purchase comes with a tax break.
Michael Newman, 34, a plastic surgeon who is now shopping for property in Hermosa Beach and Manhattan Beach, said he opposes reducing the deduction because he thinks home buying should be encouraged by the tax code.
Newman said he’d rather see a tax on luxury cars, or even higher income taxes for the wealthy, including himself.
“I hate to say it’s reasonable to raise taxes for people like me, but I think it’s reasonable. We’re at a time in which the government needs more money, and it’s only fair that people who make more contribute more,” he said.
Los Angeles economist Christopher Thornberg believes that because the proposal is aimed at such a small group, it’s not likely to move the overall housing market.
“Big whoop,” he said of the plan’s likely impact. “It would be so small as to be irrelevant.”
But Yun said Americans can’t afford even a small hit.
“This is minor tweaking, but there will be an impact,” Yun said. “Even if it’s 1%, for a household at the median home value of $180,000, that’s an $1,800 loss in housing equity.”
(BEGIN TEXT OF INFOBOX)
A lot of interest
in this deduction
In its budget the Obama administration proposes reducing the mortgage interest tax deduction for households earning $250,000 and up. Some basic facts:
When: Reductions would begin in 2011
How much: Caps the deduction at 28%. Currently, affected households can deduct their full 35% tax rate.
U.S.: Homeownership rate is 67.5%
Sources: White House, U.S. Census Bureau