Mortgage tax break threatened

Realtors oppose plan to cut interest deduction on loans

March 14, 2009|By Peter Y. Hong | Peter Y. Hong,Los Angeles Times

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 only affect households earning $250,000 or more, but opponents say it could prolong the housing crisis by slowing already torpid home sales, and deal a blow to home values already ravaged by the market crash.

"Even though the intended impact is on the top 2 percent 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 Association of Realtors.

The Realtors' group contends that the loss of the tax break will lead high-income homebuyers 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 National Association of Home Builders and the Mortgage Bankers Association 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 that currently pay income taxes at 33 percent and 35 percent rates would only be able to claim deductions at a 28 percent rate. So for every thousand dollars in deductions, a top-bracket household would save $280 in taxes, down from the current $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 the University of Southern California'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 United States, the home mortgage write-off is used by about 35 percent of taxpayers who itemize their deductions, generally a more affluent group. Roughly 90 percent of taxpayers who earn more than $100,000 itemize deductions, while about 18 percent of those earning less than $50,000 do so, according to the Tax Foundation, a nonpartisan educational group.

An NAR analysis of IRS data found high-income taxpayers who claim the mortgage interest deduction make up about 2 percent of tax filers. But a disproportionate number of those individuals and households - about one-sixth - are in California.

More than 500,000 Californians would be affected by the Obama tax change, by far the largest total among the states. New York is in second place with about 250,000 high-income filers who claim the mortgage interest deduction, the NAR analysis shows.

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