Tuesday, December 21, 2010

The Mortgage Deduction Debate, and How Angelenos May Get Screwed

This story is what sometimes drives me nuts about the Los Angeles Times. At the end of the day, the paper needs to be local first. Yet this piece, on the possibility that mortgage tax deductions may be erased, barely touches the unique circumstances faced by L.A. homeowners.

For starters, the story -- written by L.A. Times reporter Don Lee from Washington -- begins with an anecdote about Maryland homeowners:

Fifteen years ago, Carol Nietmann and her husband bought a spacious house in Maryland near Chesapeake Bay. And thanks to the time-honored tax deduction for mortgage interest, she said, their new place was a little bigger and a little nicer than they would otherwise have thought they could afford.

Much the same has been true for millions of Americans up and down the income scale. Perhaps the most sacred of all the sacred cows in the tax code, the home mortgage deduction has long been seen as crucial to a major element of the American dream — owning your own home.

It has also been a boon to home builders, construction workers, the financial services industry and local governments that benefited from fatter real estate tax revenue.

But nearly a century after coming into existence, the mortgage deduction may face a day of reckoning. Although out of the spotlight while the lame-duck Congress thrashes to an end, the mortgage deduction issue is likely to resurface next year when the new Congress — including a lot more deficit-hawk Republicans — takes over.

So here's my problem: Out here in L.A., at least since the home price escalation in 2003, homeowners have paid a little more than they can afford... in order to squeeze into a tiny home they could have easily handled in another part of the country. It's the price of living in a city like L.A., San Francisco or New York. And it's those mortgage tax deductions that allow us to pay for these homes, period.

Lee finally touches on the plight of Angelenos -- you know, the people reading his story -- but much further down, and only briefly:

On the other hand, younger homeowners in wealthier areas are likely to feel the biggest pinch. Take Hyun K. Chung of Orange County.

The 37-year-old occupational therapist has a mortgage of about $500,000 on her house, which she bought at the peak of the market in 2006. Her loan carried an interest rate of 6.4% last year, putting her interest payments at about $32,000.

Chung doesn't remember how much her mortgage deductions saved her in taxes, but based on rough estimates, it was probably about $6,600, said James Nunns of the nonpartisan Tax Policy Center.

The deficit commission's plan would slice that to about $3,800, though Nunns said the difference could be significantly offset by lower tax rates and other changes under the commission's proposal. The possible tax changes are still too imprecise to calculate exactly how they would affect people.

So in other words, no one knows how much most of us young Southern California homeowners are about to get screwed. THAT is something you oughta play up.

It's not enough, by the way, that my generation was screwed over by Prop 13 (you know, the California law that means I pay triple the taxes on my little shack than many folks do on their Hancock Park mansions) -- now our mortgage deduction lifeline is threatened as well.

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