Prospective Bay Area home buyers face a forbidding tax hit on new mortgages under a proposal by Republican lawmakers to slash federal taxes.
GOP lawmakers want to place a cap of $500,000 on mortgage interest deductions for new home loans. Under current tax law, up to $1 million in mortgage interest can be deducted.
Slashing the cap in half would hit the Bay Area, where the median home price for all nine counties was $768,000 in September and $1.075 million in Santa Clara County.
Take the Bay Area’s median home price in September of $768,000. A 20 percent down payment would leave the homeowner with a $614,400 loan. That means that the home buyer would have $114,400 that no longer would be deductible — a potentially significant tax hit.
In the pricey regions of the Bay Area, the deduction gap could widen. For example, in Santa Clara County the median home price is $1.075 million. A 20 percent down payment leaves a loan of $860,000.
That means that $360,000 would no longer be eligible for a tax deduction.
Here’s how the specific tax savings could work under two scenarios.
If a couple who is married and filing jointly had a 33 percent tax bracket, and could take the mortgage deduction for a loan of $614,400 — assuming a 20 percent down payment for a house with the Bay Area median price of $768,000 — the savings on taxes would be $12,860.
But if the same couple in the same tax bracket could only take a deduction on $500,000, instead of a deduction on $614,400, on the same $768,000 home, the tax savings would be just $10,985 — or a loss of $1,900 in tax savings.
