California Mortgage Interest Deduction Bill Withdrawn

A California bill introduced in January to limit the deductibility of mortgage interest to taxpayers’ principle residences and impose an overall cap is no longer under consideration this year.

California Assembly member David Chiu introduced A.B. 1905 in January of this year. The legislation proposed limiting a taxpayer’s deduction to just their principal residence. California currently allows the deduction to apply to interest on debt of up to $1 million owed for a taxpayer’s first and second homes. The bill would have also lowered the deduction cap from $1 million to $750,000, similar to the federal mortgage interest deduction cap established by the 2017 Tax Cuts and Jobs Act.

Chiu estimated that, if passed, the bill would generate $400 to $500 million annually. The intention was to use those funds to combat homelessness in California. Chiu cited the reason for the bill’s withdrawal included disagreements over how to best generate funding for homelessness programs as well as shifting legislative priorities due to COVID-19.

The bill had the support of community and religious groups as well as unions but was opposed by the real estate community. In a May 21 notice, the California Association of Realtors expressed their thanks to Assembly members who opposed the bill. While Chiu’s office said he may introduce similar legislation in the future, the bill is effectively dead for the rest of the year.

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How This Impacts Mobility

Deductibility of mortgage interest has long been perceived as an important stimulus for homeownership. As the U.S. strives for economic recovery, changes that reduce affordability of real estate are contrary to that goal. Worldwide ERC® members are affected by changes to mortgage interest deductions. The proposed change would have increased taxes for many higher-income California employees, with consequent impacts of gross-up calculations for their employers and caused potential difficulties in transferring employees to the state.