Nov. 9, 2017, Washington D.C. – The Senate announced new revisions in a tax bill announced Thursday. The latest version of the GOP tax bill would limit the mortgage interest deduction to $1 million. The Senate’s proposed tax bill reverses the House plan that would have capped the deduction at a $500,000 mortgage.
According to the Joint Committee on Taxation the House GOP plan, “Limiting the mortgage interest deduction at $500,000 while eliminating several deductions, would have raised $1.253 trillion in revenue.” The Senate version of the tax-bill would also continue allowing people to deduct interest paid on student loan while also preserving the ability to deduct some medical expenses.
GOP Tax Plan Would Hit California Housing Market Hard
Renters who are thinking of buying a home in the hot California housing market should be aware of what the Republican House is planning in its tax overhaul bill. If the bill becomes law, many California home owners could lose valuable tax deductions that help to ease the pain of the sky-high real estate prices in major cities.
The GOP house bill would limit the size of mortgage loans that taxpayers can deduct interest payments on to only $500,000. For most US markets, at least XX percent of homes that are purchased are below $500,000.
But in California, it is another story. In many cities, the median home value is above $500,000. For example, in San Jose CA, 75% of new of new mortgages in 2017 are above $500,000, housing data provider CoreLogic, Inc. states. San Jose has a median home price above $1 million, and even starter homes are usually above $500,000.
In these other markets in California, below are the percentages of mortgage loans in 2017 that are above $500,000:
- San Francisco: 60%
- Los Angeles: 44%
- San Diego: 37%
And the financial blow would not just be in California. In Honolulu, 48% of home loans this year were above $500,000. In New York City, 22% were, and in Seattle, 25% were above the half million mark.
ATTOM Data Solutions also performed a similar mortgage analysis for Washington DC, where 35% of purchase and refinance loans were for more than $500,000 this year.
GOP House Bill Would Cap Property Tax Deductions, Too
For Californians, the reduced tax deductions would not be limited to mortgage interest, either. The bill also places a cap on the property taxes that can be deducted on tax returns to only $10,000 each year. This would be a blow to Californians as well. Many homeowners across the state pay several times that much in property taxes.
But some California lawmakers have downplayed the effects of the GOP bill on the local housing market. Rep. Dana Rohrabacher stated this week that the effect of a lower mortgage interest deduction will be limited. She argues that people who buy homes in the future will be a smaller number of people.
She said that the proposed change would only affect future purchases, so it is not a major political issue. Rohrabacher noted as well that very few people in her district buy a home based upon the tax deductions that are available.
Generally, Republican lawmakers in Congress from the state have stayed together on the propose bill. But Republicans from NY and NJ are threatening to vote against the bill because of the lower mortgage interest deduction.
Effects of Mortgage Interest Deductions Are Controversial
It is true that if the bill becomes law, many Californians will pay higher taxes. But a critical question, experts say, is whether the reduced tax advantages for home ownership in more expensive areas would put a damper on the market.
Many economists argue that the level of the mortgage interest deduction does not have a major effect on home ownership. They say that the mortgage interest deduction increases home prices as it encourages people to buy pricier homes, so they can write off more interest.
On the other side, realtor groups argue that the mortgage interest deduction is an incentive for the middle class to buy homes. Most realtor groups do not want to see the mortgage interest deduction changed. One of them, a California realtor named Jeff Barnett, argues that his area of the state will be hit hard if the bill becomes law. He believes that even if the major corporate tax cut helps to improve the economy, he does not think it will be enough to prop up the California housing market. Barnett believes that there are too many incentives being taken away from buying a home.
It is important to remember, however, that most of the country will not see a major effect to any changes in the mortgage interest deduction. Even in Portland OR, which has seen major price increases recently, just 6% of home loans are for more than $500,000. In Austin TX, only 5.5% of home loans are above that level.
House Committee Approves Revised Tax Bill
The Senate still is trying to figure out how to treat state and local tax deductions. The Los Angeles Times reported that the upper body is less focused on that issue than the House.
A House committee voted along party lines Thursday to approve the Republicans’ sweeping tax overhaul bill. Rep. Kevin Brady (R-Texas), chairman of the House Ways and Means Committee “Americans deserve a new tax code for a new era of prosperity, and today we deliver.” The panel’s approval by a 24-16 vote came as the Senate unveiled its own version of tax legislation
According to the report, House Majority Leader Rep. Kevin McCarthy, R-California, said, the tax plan “lives up to its name” by “cutting taxes for individuals, families, and businesses of all size and delivering more jobs and higher wages for the American people.”