The deduction is heavily used in pricey cities like San Francisco, New York and Boston. Under current tax law, homeowners can deduct interest on mortgages of up to $1 million. But under the House plan unveiled Thursday, that cap would be reduced to $500,000.
San Francisco home buyers — where the median price was even higher at $1.1 million — would face particular difficulties in affording homes as a result.
If a buyer took out an $800,000 mortgage on a $1 million home under the current system, the interest on the entire mortgage would be deductible. At a 4.5 percent interest rate, the deductible interest on a 30-year mortgage would start out at roughly $4,000 a month. Under the new proposal, three-eighths of that payment — about $1,500 — would no longer be deductible.
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“In parts of the country where home prices aren’t even at that price point, then it makes no difference whatsoever,” said Rick Turley, vice president and managing broker at Alain Pinel Realtors in San Francisco.
But this plan, he said, is aimed directly at coastal cities with pricey real estate.
The administration said the $1.51 trillion plan is an “important step toward providing massive tax relief for the American people.” Most Americans will not be affected by the proposed change because they have either already paid off their homes or have mortgages that are less than $500,000.
But, in the Bay Area, experts say the new plan would make the notoriously expensive and competitive housing market even less attractive for buyers.
According to a September report by Zillow, 99 percent of homes in the San Francisco metro area are worth enough money to make the mortgage interest deduction worth it. In Los Angeles, that number is 96 percent. In the St. Louis area, only 13 percent of homes are worth enough for the deduction. Around Pittsburgh, only 10 percent see a benefit.
Under the proposed tax bill, which includes an increase in the standard deduction, those percentages would drop significantly: 59 percent in San Francisco; 30 percent in Los Angeles; 1 percent in St. Louis; and less than 1 percent in Pittsburgh.
“Middle- and upper-middle-income people are going to be worse off,” said Ken Rosen, chair at UC Berkeley’s Fisher Center for Real Estate and Urban Economics, arguing that its backers are motivated by partisan concerns against heavily Democratic coastal cities. “This is a bait-and-switch plan. It is very anti-housing, it is revenge, and it is a big, big mistake.”
The National Association of Realtors refused to support the bill Thursday, saying that it threatens home values and will put homeownership out of reach for middle-class families.
In theory, the new tax code could deter buyers from overbidding for a home and therefore eventually bring prices down. But experts are pessimistic that would be the case in the Bay Area, where demand far outstrips supply.
Aaron Terrazas, a senior economist at Zillow, said that, in the short term, this lack of tax incentive may not change buyers’ behavior — but the effects will manifest in other ways.
“The reality is that when people go to buy a home, they are not exclusively thinking of the deduction,” he said. “They are not going to easily change where they live, but the effects will come out of consumer spending. They may have less savings or be less likely to buy a car.”
On Thursday, the Republican National Committee hailed the tax reform bill that “overhauls our nation’s outdated tax code.” The party organization said the bill would give families bigger paychecks, encourage small business growth and jump-start the economy.
But when it comes to housing in San Francisco, opinions on the bill are much bleaker.
“The rest of the country probably perceives our median purchase price (of $1.1 million) as a very luxurious home,” Turley said. “But that’s just our median home.”
Trisha Thadani is a San Francisco Chronicle staff writer. Email: email@example.com Twitter: @TrishaThadani