Californians’ Home Mortgage Deduction Would Be Capped Under New Bill

California homeowners with big home loans and vacation properties would owe higher taxes under new legislation to raise money for programs to get the state’s homelessness crisis under control.

The bill by Assemblyman David Chiu, D-San Francisco, would cap a state tax break for mortgages to the interest paid on the first $750,000 of a loan for a primary home. It would eliminate the deduction altogether for mortgage interest on second homes.

Chiu’s office estimates the changes would bring in $400 million to $500 million per year, which would be set aside as dedicated funding for shelters, permanent supportive housing and other homelessness services.

“These are the individuals who own the most expensive homes in California,” Chiu said. “It’s a small price to pay among a small number of wealthier homeowners to establish a permanent fund for homelessness prevention.”

Legislators and Gov. Gavin Newsom are coming under growing pressure to reduce homelessness, which many voters now consider the biggest problem facing the state. The latest count taken in 2019 found 151,278 homeless people in California, an increase of 16% since 2018.

The Legislature approved $650 million in emergency aid for cities and counties last year to combat homelessness, and Newsom proposed a $750 million fund this week to get homeless people off the streets and into housing and treatment programs.

But Chiu noted that the money set aside in recent years has been in the form of one-time appropriations, a “piecemeal approach” that he said was not enough to address the “most intense homeless crisis that California has ever experienced.”

Under his bill, AB1905, about 175,000 taxpayers would lose their mortgage interest deduction for second homes and owe approximately $1,000 more on their taxes, according to Franchise Tax Board estimates.

“It has made no sense for our government to subsidize secondary vacation homes when 150,000 people don’t have a place to sleep at night,” Chiu said. “Everyone should have a roof over their head before we help people buy two.”

The cap on primary-home deductions would apply to loans larger than $750,000 that homeowners have taken out since Jan. 1, 2018, conforming to a change made by President Trump and congressional Republicans in their 2017 tax overhaul.

California now allows homeowners to deduct the interest on up to $1 million in mortgage debt. Reducing that limit would affect about 224,000 taxpayers and cost them approximately $750 more in taxes annually, according to the Franchise Tax Board.

“In this odd turn of events, it turns out I may agree with one thing the Trump administration pushed for,” Chiu said.

Any tax changes require a two-thirds vote in both houses of the Legislature, a heavy lift even with Democrats holding more than a supermajority in the Senate and the Assembly.

In 2017, Chiu tried to eliminate the mortgage interest deduction for second homes to fund affordable housing. After passing three committees, the bill died on the Assembly floor without a vote.

The California Association of Realtors and its local affiliates led the opposition, arguing that it would cost the state thousands of home sales each year. The organization declined to comment on Chiu’s new proposal until it had reviewed the bill language.

Conforming to the Trump tax overhaul would create an additional political complication. That law, which also capped state and local tax deductions on federal returns, was unpopular in California, and Democrats campaigned against it on their way to winning seven Republican-held House seats in the 2018 elections. When Newsom sought to adopt some of its provisions at the state level last year to expand a tax credit for the working poor, even some Democratic legislators supportive of the idea worried about the appearance of siding with a Trump policy.

Chiu said the mortgage interest deduction, which costs California more than $4 billion per year in tax revenue, is essentially the state’s biggest housing program. But if lawmakers today could choose how to spend those resources, he said, “we’d never decide to subsidize second vacation homes” over helping homeless people.

“Eliminating this tax break is simply the moral thing to do,” he said.

Posted on on 1/9/2020.