California Bill Would Limit Mortgage Interest Deduction

A bill has been introduced in California’s State Assembly to adopt and expand on the federal limit on home mortgage interest deductions imposed by the Tax Cuts and Jobs Act (TCJA).

The bill, AB 1905 would reduce the maximum mortgage debt on which interest may be deducted to $750,000, as under the TCJA. However, unlike the TCJA, the bill would also limit deductible interest to the principal residence (federal law allows deduction of interest on the principal residence and one additional residence). Savings from the change would be required to be devoted to the California Housing and Homeless Response Fund, which is intended to fight homelessness. If adopted, the law would be effective 1 January 2020, but would apply not only to new mortgages but to mortgages taken out on or after 1 January 2018.

California has generally not conformed its tax law to the TCJA, with some limited exceptions. For example, California still permits the deduction/exclusion of moving expenses. The new bill in effect partially conforms California’s tax law to federal law with respect to home mortgage interest.

Prospects for the new bill are uncertain.

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How This Impacts Mobility

The proposed change would seriously impact taxes for many higher-income mobile employees in California, with consequent impacts on gross-up calculations for their employers, and potential difficulties in transferring employees to the state.