House Republican Proposal To Cap Home Mortgage Interest Deduction
House GOP proposes to reduce the deduction for home mortgage interest from $1 million to $500,000. This will strike hard at California home buyers beginning 1/1/18.
“The House GOP proposal modifies the home mortgage interest deduction in the following ways. First, under the proposal, only interest paid on indebtedness used to acquire, construct or substantially improve the taxpayer’s principal residence may be included in the calculation of the deduction. Thus, under the proposal a taxpayer receives no deduction for interest paid on indebtedness used to acquire a second home.
Second, under the proposal, a taxpayer may treat no more than $500,000 as principal residence acquisition indebtedness ($250,000 in the case of married taxpayers filing separately). In the case of principal residence acquisition indebtedness incurred before the date of introduction (November 2, 2017), this limitation is $1,000,000 ($500,000 in the case of married taxpayers filing separately).97
Last, under the proposal, interest paid on home equity indebtedness is not treated as qualified residence interest, and thus is not deductible.
Effective Date: The proposal is effective for interest paid or accrued in taxable years beginning after December 31, 2017.” Joint Committee on Taxation, Description of HR 1, The Tax Cuts and Jobs Act (11/6/2017)
This could be absolutely devastating to middle class home ownership in California. In San Francisco and many of the contiguous Bay Area counties, the median home prices exceed $1 million. http://www.car.org/marketdata/data/countysalesactivity/ In Orange, the median home is $800,000 and in Los Angeles, Ventura and San Diego it exceeds $600,000.
The arguments in favor of ending the deduction are two fold: 1) it inflates home prices, making them more affordable and 2) its regressive as the value of the deduction increases with higher incomes and tax brackets. On the flip side, it's a deeply embedded policy and its repeal or the House proposed cap could cause home values to drop. Furthermore it penalizes new home buyers while advantaging existing homeowners.
The House Republicans from California who are supporting this tax proposal will be denying mortgage interest deductions to more than half of homebuyers beginning January 1, 2018. This may lock you, your children and/or your grandchildren out of the market for a starter home or a new home beginning in January. You may want to contact your local federal Congressperson.
Prepared by: Lucien Wulsin