Proposed mortgage deduction cap a bad deal for Pleasanton Proposed mortgage deduction cap a bad deal for Pleasanton (October 21, 2005)

by Jeb Bing

If a plan to cap mortgage deductions at approximately $312,895 became law, it would reach deep into the pockets of many Pleasanton homeowners. While I don't have a mortgage that high, many of my friends do. In my interviews of local real estate agents and brokers for last week's special Real Estate section in the Pleasanton Weekly, quite a few said that with creative financing and mortgage plans, many of their clients have mortgages above $500,000, even up to $1 million, which has been the long-standing cap for mortgage interest deductions by the Internal Revenue Service.

But at a tax reform meeting last week in Washington, D.C., President Bush's Tax Panel discussed limiting the break to loans over $312,895. As Sen. Dianne Feinstein (D., Calif.) points out, that's far lower than the median-priced home in California of $568,890. In Pleasanton, it's much higher. According to Pleasanton mortgage planner Dave Walden of Diversified Capital Funding, about 80 percent of homeowners who have purchased their homes in recent years have mortgages over $312,895, some higher with 90 to 100 percent financing. They could face losses of well over $6,000 a year in reduced tax deductions. This proposed cap would be disastrous for their ability to pay their monthly mortgage and other living expenses they count on from the deduction offset and would be disastrous for the real estate industry. Walden explains that a homeowner's mortgage interest tax deduction is prominently involved in a family's decision to purchase its first home and to the acquisition of subsequent homes, including second homes, in the future. Many have taken out equity loans on their homes, which have enjoyed phenomenal appreciation, and these loans also would figure into the proposed $312,895 cap. While the $1 million limit has not affected many families, with mortgages in that amount mostly seen in the higher cost housing markets on both coasts, analysts believe that a $312,895 cap would affect an estimated 80 percent of families in California. Clearly, the Tax Panel's proposal is testing the political waters to see what might fly. But even a compromise at $400,000 would hurt. A mortgage in that amount at 6 percent interest provides a $24,000 deduction. That is equal to an $8,400 payback in your pocket if you're in the 35 percent tax bracket, which many Pleasanton families are.

It's easy to say that the proposed cap will never be passed. But remember that most of the red states that control Congress have much lower housing prices and few of their constituents have mortgages that top $300,000. For Feinstein and her colleagues in blue California to prevail in their opposition, it will take a groundswell of public outcry to ensure that this proposal dies in the Tax Panel long before it reaches the House or Senate. There's also the concern that even if the cap is raised to, say, $600,000, which would affect fewer homeowners, the IRS will have its foot in the door to move the cap downward whenever the feds need more revenue. We've already seen how short-term parcel taxes or "temporary" increases in sales taxes and bridge tolls have a way of becoming permanent. We might want to let our elected representatives know about our concerns that any mortgage cap below the long-accepted $1 million ceiling could be devastating for our local economy and continued strong real estate market and could impact many homeowners who are financially dependent on their mortgage interest deductions.
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