Cutting the Mortgage Interest Tax Deduction

By Patti Ziemke

 In California, as in other states, housing prices are rapidly falling. Mortgage rates are good and some people, especially couples who make over $250,000 and have good credit, may be looking to get in on the deal. However a recent proposal of cutting the mortgage interest tax deduction may squash their plans.

Rate Reduced

The cut is only intended to impact the top two percent of households, but for states such as California and New York, the results may be more wide-spread. According to the Realtors' Association approximately 500,000 people in California who claim the deduction will be affected.

The budget plan will cut the itemized deduction rate from its current 32 to 35 percent down to only allowing claims at a 28 percent rate. That means for every $1,000 in a mortgage interest deduction, $70 would be taken.

In an article in the San Francisco Chronicle, titled, "Mortgage Interest Tax Deduction Cut Criticized," on February 28, 2009 by James Temple it explains that a woman who owns a million dollar home at five percent interest rate would be able to deduct approximately $17,500 at the current 35 percent rate. At the new proposed 28 percent rate that amount would be reduced by $3,500.

High Cost of Living

It is argued by Kenneth Rosen, a University of California Berkeley economist, in an article in the Los AngelesTimes that appeared on March 14, 2009 entitled, "Plan to Cut Mortgage Interest Deduction Stirs Opposition," by Peter Y. Hong, that many couples in California earning over $250,000 does not mean that the couple is wealthy. Cost of living is higher in places such as New York and California and those extra hundred dollars in deductions would be missed.

Rosen further suggests a better way of trimming the deduction: account for it regionally based on home values. Even as the market has taken a hit, a typical 4 bedroom, 2 bath home in the San Francisco area is priced at well over $500,000 - a significant difference than a similar home found in Cleveland Ohio that is priced at about $200,000.

Impact on Real Estate Market

However Los Angeles economist Christopher Thornberg quoted in the same article in the Los Angeles Times, says the cut will effect such a small percentage of people the impact will be insignificant. Not so according to the National Association of Realtors and the National Association of Builders. They believe this rate cut will not only hurt the top two percent that is targeted, but negatively impact real estate prices across the board and plans to vehemently fight this proposal.

The new rate would go into effect in 2011 if approved by Congress.