MIDs on Second Homes May End in California

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Property owners in California — especially those who own second homes there — may find themselves paying more in income taxes if a bill designed to end the mortgage interest deduction on vacation homes passes the state assembly.

The bill, which was introduced by Assemblymember David Chiu (D-Francisco), would eliminate the MID on second homes and reform the MID on primary residences. The bill would use the savings from those reforms to create funding to address homeless policy solutions statewide.

David Chiu

“While thousands of Californians sleep on our streets every night, it makes little sense for the state to subsidize the wealthy’s ability to own two homes,” said Chiu in a statement. “Eliminating this tax break to create a permanent source of funding to address our homelessness crisis is simply the moral thing to do.”

The homeless population in California increased by 17 percent in the last year alone, and the state is home to more than 150,000 homeless individuals on any given night. Chiu said the state has the largest unsheltered population in the United States.

Chiu’s Assembly Bill 1905 would set up a permanent fund to help better coordinate efforts to combat homelessness, helping to create long-term solutions for homelessness through ongoing budget allocations.

“Asm. Chiu’s proposal is simple: if you have two homes, you should help families who have none to get a roof over their head,” said Lisa Hershey, Executive Director of Housing California. The wealthiest Californians can and should pay their fair share to ensure California is a place that all families, especially those experiencing homelessness or on modest incomes, can call home.” 

Chiu said the disparity in housing means that, for instance, in Los Angeles County, 133 people are housed while 150 become homeless. The assemblyman said that the largest ongoing investment the state makes in housing is the mortgage interest deduction, which disproportionately helps people with higher incomes and bigger mortgages, and will cost the state $4.2 billion this fiscal year.

“Up and down the state, cities and counties like San Francisco need more support to help those suffering on our streets and sidewalks,” said San Francisco Mayor London Breed. “By creating a permanent funding stream to help local governments do the work to address homelessness, we can get more people healthy and housed..”

The MID allows state income taxpayers to deduct the interest on their mortgages on their annual tax returns — and the deduction is allowable on primary residences and vacation homes. But it is only available to filers who itemize their deductions, rather than those who accept the standard deduction.

The bill seeks to entirely eliminate the MID for second homes. For primary homes, taxpayers who have qualified home loans acquired in 2018 or later will see the amount of interest they can claim reduced from $1 million to $750,000, which would mirror federal law. 

Chiu’s office estimates the savings from the two measures would be somewhere around $400-$500 million annually. Those savings would fund the Housing and Homelessness Response Fund.

California’s state population is 40 million, but only 175,000 use the MID on vacation homes, for an average savings of $1,000 a year. Roughly 224,000 taxpayers claim the MID on primary home mortgages obtained in 2018 or later. 

A 2016 report from the California Franchise Tax Board indicated that most economists say the MID does not increase homeownership or affordable housing.

This is the second time Chiu has sought to eliminate the MID for second homes. In 2017, he filed a bill that passed three committees but died on the floor without a vote, the San Francisco Chronicle said. 

The California Association of Realtors and its members opposed that bill, arguing that it would cost the state thousands of home sales each year.