Congressional Republicans introduced a tax overhaul plan that would disproportionately affect future homebuyers in high-priced real estate markets such as Southern California.
Right now, homeowners can take deductions on home mortgages worth up to $1 million. But the GOP plan would cap these deductions at $500,000 for future homeowners.
That won’t change things much for states with low housing costs. But it’s a different story in Los Angeles, where the median home price tops $630,000. Geoff McIntosh, president of the California Association of Realtors, predicts that fewer homebuyers will be able to enter the market.
"They’re going to be forced to be renters or be forced to consider moving out of state or at least moving further from their place of employment," McIntosh said.
Tens of thousands of new homeowners could potentially be affected. Research by ATTOM Data Solutions shows that 15 percent of all homes sold or refinanced in Los Angeles County this year so far involved mortgages above $500,000.
The percentage is 18 percent in Orange County and 14 percent in San Diego County. In lower-cost San Bernardino County, the share of $500,000-plus mortgages is 3 percent.
McIntosh said the mortgage deduction change will only squeeze homeowners who will lose out through other aspects of the GOP plan, such as its call to eliminate the deduction for state and local income taxes.
That deduction can be significant for many Californians, said UCLA law professor Jason Oh.
“Because of how high state and local taxes are in California, more Californians itemize than in many other states,” he said.
About one in three taxpayers itemizes in California.
Republicans say many would still benefit under their plan, thanks to a bigger standard deduction. The bill calls for raising the standard deduction from $6,350 to $12,000 for individuals, and from $12,700 to $24,000 for married couples.
Rep. Brad Sherman (D-Sherman Oaks), who once chaired California's tax agency, believes the GOP is also pursuing another goal with this part of its tax plan.
“It also is designed to put political pressure on California to become more like [low-tax and low-spending] Texas and Mississippi,” Sherman said.
The idea is that ending the deduction for state and local income taxes could spark a popular push for tax cuts in California, he argued.
Oh said he’s interested to see how state and local governments react to this new federal tax system, if it becomes law.
He thinks many states could choose to lower their income taxes, and offset those cuts with higher property taxes. That could give their home-owning residents more to deduct from their federal tax bill.
“But unfortunately in California, because of Prop. 13, that kind of move away from non-deductible income taxes and toward deductible property taxes is hard to do,” Oh said.
Prop. 13 caps property taxes in California at 1 percent of a home’s value at the point of purchase.
Housing advocates are also concerned that the GOP tax proposal will have a negative impact on the construction of affordable housing.
A planned reduction in the corporate income tax cut could potentially hurt the Low-Income Housing Tax Credit program. That program offers companies tax breaks through a set-up where affordable housing developers sell tax credits to corporate investors.