The Republican tax bill unveiled Thursday includes a change that would limit the amount of loan interest wealthy homeowners in the U.S. can write off—a move that would have the greatest effect in expensive coastal cities, according to data analysis by Mansion Global.
Under current law, mortgage is deductible equal to the amount of annual interest homeowners paid on loans of up to $1 million (plus a home equity line of credit up to $100,000). The proposed tax plan would chop the upper limit down to loans up to $500,000.
The change would mean increased taxes for affluent mortgage holders everywhere, but packs a particular punch in places like New York, Los Angeles and San Francisco, where home prices are triple or quadruple the national average and a home loan for a single property often exceeds $500,000, according to Mansion Global’s analysis of data provided by the Home Mortgage Disclosure Act.
In San Francisco, where the median home price hovers around $1.3 million, thousands of homeowners would lose part of their tax break under the proposed change. Most mortgages, 84% to be exact, that originated last year in San Francisco and neighboring San Mateo counties were over $500,000, the data shows.
In Los Angeles, the average home loan originated last year was $533,000.
Homebuyers in Manhattan hold some of the nation’s most expensive mortgages. Last year, the average new home loan topped $1 million and one in three took out a loan greater than $500,000, according to the government data from the Home Mortgage Disclosure Act.
The typical mortgage holder in Battery Park, Tribeca and the Upper West Side would see their tax savings under the deduction nearly cut in half, as the average outstanding mortgage balance in those neighborhoods is over $800,000, according to a study released this year by financial website LendEDU using data from Experian.
Thousands of mortgage holders in neighboring Brooklyn would also lose a portion of their tax write-off. Last year, the average home loan in the borough was over $628,000, according to data from the Home Mortgage Disclosure Act.
Nela Richardson, chief economist at Redfin, called the bill a missed opportunity to make homeownership more affordable.
“The new $500,000 cap,” she said, “limits the benefit for first-time buyers in expensive coastal markets where it’s hard to find a starter home at that price.”
For home buyers with larger mortgages, the change to this single deduction can amount to tens of thousands of dollars in lost tax savings.
For instance, someone who borrowed $800,000 at the average interest rate of around 4% could save more than $30,000 on their taxes in the first year, according to the mortgage calculator on personal finance website NerdWallet. The proposed rules would reduce that tax benefit by over $10,000.
House lawmakers are trying to sell the tax bill as pro-middle class, by doubling the standard deduction to $12,000 and keeping at least part of the mortgage interest deduction. But William E. Brown, president of the National Association of Realtors and founder of Investment Properties in Alamo, California, said the change would remove incentive to own a home for some.
The tax bill “takes money straight from the pockets of homeowners,” Mr. Brown said in a statement. “This bill is nowhere near as good a deal as the one middle-class homeowners get under current law.”
Limiting the mortgage interest deduction is one of many changes—including eliminating the so-called “death tax” on inheritance over $5 million and consolidating today’s seven tax brackets into just four—that the GOP is proposing. If passed, the bill would mark the broadest rewrite to the tax code in 30 years, but is up against major opposition from Democrats who say it heavily favors the rich.
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