Mortgage Interest Deduction Would Be Slashed Under GOP Tax Plan, a Cause for Concern in California

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The homebuilding industry looks like an early loser from the GOP plan to overhaul the tax system – and so do many California homebuyers.

Homebuilding stocks fell sharply on Thursday after details about the Republican tax reform bill were released, including proposed limits to key tax breaks that favor homebuyers.

Here are the key provisions related to homebuying and building:

  • Limits deductible mortgage interest: The bill preserves the mortgage deduction as currently structured for existing mortgages. But it curbs it for mortgages on newly purchased homes going forward. You would only be able to claim a deduction for interest you pay on mortgage debt up to $500,000, down from $1 million today. The percent of filers who claim the mortgage interest deduction would fall to 4% from 21% currently because the standard deduction would nearly double, according to Tax Policy Center estimates.
  • Repeals to state and local tax deductions, but preserves property tax break: The original GOP proposal was to fully repeal the state and local tax deduction, which lets filers deduct their property taxes as well as their state and local income or sales taxes. But it was met with strong opposition from lawmakers in high-tax states and cities. So Rep. Kevin Brady, chairman of the House Ways and Means Committee, made a concession. The House bill restores an itemized property tax deduction for property taxes up to $10,000.

Watering down these tax breaks could be bad news for people who want to buy homes, especially pricier properties or ones in more expensive cities.

California homebuyers are likely to experience a significant "blow" from the changes, particularly the halved mortgage interest deduction cap, the Los Angeles Times reported.

In Los Angeles County, the median home price this past June was a record high $569,000, the Times reported, citing data firm CoreLogic. Statewide, the median was $470,000. The medians are much higher in the San Francisco Bay Area.

Brady defended the proposed mortgage interest deduction limits, saying Republicans felt the bill's doubling of the standard deduction for couples and changes to income tax brackets would provide relief "tax relief for Americans regardless of where they live," the Times reported.

Millions of Americans benefit from the existing – and very popular – mortgage interest deduction.

"All mortgages today remain as they are going forward," Brady said. "In the future, you can deduct interest on newly purchased homes up to $500,000."

Californians would also be disproportionately hurt by the state and local tax deduction changes in part because the state has the highest state income tax rate in the U.S., the Times reported.

The tax overhaul already faces opposition from some business groups, most notably the powerful homebuilding lobby.

The National Association of Home Builders said in a statement on Monday, after some details about declining deductions emerged, that the GOP tax bill "will harm home values, act as a tax on existing home owners and force many younger, aspiring home buyers out of the market."

The negative reaction from homebuilders underscores the difficult nature of ushering in sweeping tax reform. In order to pay for the loss of corporate tax revenue, lawmakers need to close tax breaks. But those loopholes are coveted by various business groups, setting off what Chris Krueger of Cowen Washington Research Group has dubbed a "corporate hunger game."

Shares of Toll Brothers, which makes luxury homes in major U.S. cities, tumbled 6% on Thursday. That would be the stock's worst day since late 2015. KB Home, Hovnanian and PulteGroup lost between 2% to 4% apiece.

The SPDR S&P Homebuilders ETF shed 2.6%, putting it on track for its biggest loss since October 2016.

The overall market reaction was more muted. U.S. stock markets traded mostly flat, remaining near all-time highs. Stocks have soared this year, partially due to hopes that the GOP tax overhaul would drastically cut what Corporate America owes to Uncle Sam. The GOP tax bill would permanently slash the corporate tax rate from 35% to 20%.

KTLA's Melissa Pamer contributed to this article.

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