The mortgage interest deduction (MID) as we know it is in peril under the current federal tax proposal.

The MID is a tax deduction on interest accrued and paid on mortgages. Mortgage interest is deductible from income as an itemized expense if the mortgage:

  • funded the purchase price or paid for the cost of improvements to the owner’s principal residence or second home; and
  • is secured by either the owner’s principal residence or second home. [Internal Revenue Code §163(h)]

Under the current rules, about one-third of homeowners receive a financial benefit from the MID when they itemize their taxes. These homeowners who benefit pay a hefty amount of mortgage interest, and have relatively large mortgage balances. For instance, a homebuyer purchasing with a 20% down payment today needs to buy a home valued at least $305,000, according to Zillow.

However, the tax changes proposed by the current administration and Congress:

  • double the standard deduction; and
  • no longer allow state and local taxes to be deducted.

Under these rules, the average homebuyer today would have to buy a home valued at least $805,000 — a not so average price for most Californians.

By Zillow’s estimate, this dwarfs the population of homeowners potentially benefiting from the MID from 30% of the homeowner population down to a scant 5%. In other words, it goes from helping a few to helping even fewer.

The potential impact for California

Here in California, the impact — if the proposals pass — won’t be quite as devastating as the rest of the nation. It’s almost always beneficial to take the MID in California since home values are so high here (though not necessarily in the $805,000 range).

Still, the proposals would significantly decrease the percentage of homeowners taking the MID even here, from:

  • 99% in San Francisco under the current tax rules to 59% under the proposed rules;
  • 96% in Los Angeles to 30%;
  • 94% in San Diego to 20%;
  • 73% in Sacramento to 5%; and
  • 56% in Riverside to 3%, according to Zillow.

The MID is already surrounded in controversy, and this tax proposal fully embraces the drama and ratchets it up to the next level.

The controversy surrounding the MID is relatively straightforward: it heavily benefits the wealthiest Americans with large mortgages, at the expense of the lower and middle class with smaller mortgage balances. This is a criticism frequently noted by the first tuesday Editorial Staff.

The MID favors the wealthiest 20% of the nation’s mortgaged homeowners, providing four times the amount of housing subsidy to this class of earners than the poorest 20% of mortgaged homeowners. After all, the size of the subsidy runs with the size of the mortgage.

Related article:

The MID truth test

However, this new envisioning of the MID takes a bad idea and makes it even worse. Under this proposal, the MID will no longer disproportionately benefit wealthy Americans — it will disproportionately benefit super wealthy Americans specifically.

Want to protect the MID as it currently stands? Contact your congressional leaders.

Related article:

The mortgage interest deduction, explained