Plan to cut mortgage-interest deduction fuels fight

Los Angeles Times

President Barack Obama’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 affect only households earning $250,000 or more, but opponents say it could prolong the housing crisis by slowing already torpid home sales and deal a another blow to home values 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 home-buyers 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 odds of that happening may be greater in California, where about 500,000 tax filers who claim the mortgage interest deduction earn enough to be affected by the proposed cut, the Realtors’ association says.

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 subject to 33 percent and 35 percent rates would only be able to claim deductions at a 28 percent rate. So for every $1,000 in deductions, a top-bracket household would save $280 in taxes, down from $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 U.S., 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.