For decades, the home mortgage interest deduction has been one of the most sacred of cows in the U.S. tax code. Now, Republicans crafting legislation to overhaul the federal tax system and cut rates are considering placing new limits on the home mortgage interest deduction. And thousands of Californians could feel the pain.
Making sense of the story:
- Homeowners now are allowed to deduct interest paid on as much as $1 million of mortgage debt. Congressional Republicans and White House officials are looking at reducing the limit to $500,000, which would lead to billions of dollars more in federal revenue every year.
- Homeowners still would be able to deduct interest on the first $500,000 of a mortgage, but would lose the deduction for interest paid on any amount above that level.
- Most Americans would not be affected by such a change, either because they own their homes outright, their mortgages are less than $500,000, or they don’t have enough deductions to file an itemized tax return.
- But in states with high earners and pricey real estate, reducing the mortgage interest deduction would force hundreds of thousands of homeowners to pay more taxes.
- The California Association of REALTORS® estimates if Congress were to move forward with a cap on the mortgage interest deduction for loan amounts up to $500,000, a quarter of California’s home sales would be impacted, and those home buyers would end up paying more in taxes. And for those in Southern California, nearly one-third would be affected.