Few tax breaks have had the political staying power of the mortgage interest deduction. Strongly backed by influential real estate interests, lawmakers of both parties have championed the deduction as integral to achieving the American dream of homeownership.
Huge amounts of money are involved. In 2013, California state returns reflected more than $53 billion in mortgage interest deductions, reducing state income tax revenue by an estimated $3.4 billion, according to the California Franchise Tax Board.
State tax data, though, shows that the mortgage interest perk has increasingly skewed toward wealthier filers over the past 20 years.
In 1995, three-quarters of the total mortgage interest deduction claimed that year came from taxpayers with state adjusted gross incomes of under $100,000. By 2014, taxpayers in that income range represented only 42 percent of the total amount of mortgage interest deducted that year – even as the total number of taxpayers in that income range increased by about 1.6 million.
Under federal and state tax law, taxpayers can deduct their mortgage interest from their income. Only interest on the first $1 million in borrowed money for the principal residence and one other residence can be deducted.
But the share of the mortgage interest deduction for wealthier taxpayers – those with state adjusted gross income of $200,000 to $500,000 – increased from less than 7 percent of the total claimed in 1995 to almost 20 percent in 2014.
And the portion claimed by top earners – those with with adjusted gross income of $500,000 and up – more than doubled from 0.4 percent of the total in 1995 to 1 percent of the total in 2014.
What explains the trend? Housing has become far more expensive in California. Experts lay part of the blame on the mortgage interest deduction itself, as sellers and buyers take that savings into account when pricing and purchasing homes. The inflation-adjusted median price of a California home rose from about $325,000 in 1990 to almost $450,000 in 2015, according to the Legislative Analyst’s Office.
Banks and other financial institutions, meanwhile, tightened up on lending following the mortgage meltdown that helped trigger the last recession.
Three-quarters of taxpayers with state adjusted gross income of $100,000 or less claimed the standard deduction in 2014, with only one-quarter itemizing mortgage interest or other deductions. That’s down from almost one-third of state taxpayers in that income range who itemized their deductions in 1995.
67.1 Percentage of taxpayers with California adjusted gross income of less than $100,000 who claimed standard deduction in 1995
74.2 Percentage of taxpayers with California adjusted gross income of less than $100,000 who claimed standard deduction in 2014
Realtors have said homeownership rates would suffer without the interest deduction. They oppose pending legislation that would eliminate the deduction for second homes and direct the savings to low-income housing programs.
State tax data does not break out the deduction of interest on second-home mortgages. But in a letter this month objecting to AB 71, the California Association of Realtors argued that second homes are not necessarily vacation homes.
Realtors also had a gloomy take on President Donald Trump’s proposed tax overhaul that would increase the standard deduction, suggesting it could reduce the value of the interest tax break.
“Eliminating incentives for homeownership would lower the demand for housing and result in lower home values,” Denise Welsh, president of the Silicon Valley Association of Realtors, said this month.
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