Changes are probably on the way for the mortgage interest tax deduction, as the Obama administration attempts to right the federal budget.

President Obama campaigned with the slogan, "Change we can believe in." But is he bringing it? It depends on whether you believe in paying higher taxes. The change President Obama is talking about now would strap certain households with a reduced mortgage interest tax deduction. Some analysts believe the move will open the door to eliminate the mortgage interest deduction altogether.

Robin Hood, the tax man

The latest federal budget proposal includes a Robin Hood provision that has the real estate industry fuming mad. Households earning more than $250,000 annually, which are subject to 33 and 35 percent tax rates, would be able to claim deductions only at the 28 percent rate. That equates to a tax increase of up to $70 for every $1,000 of all itemized deductions, including the popular mortgage interest tax deduction.

The mortgage interest tax deduction has been part of the U.S. federal tax code since 1913. It is enmeshed in our country's consciousness to the point that prospective homeowners rely on estimated tax perks to determine their homebuying budget. While the new proposal won't affect every homeowner, real estate lobbyists worry that this change is just the beginning-that the mortgage interest tax deduction could eventually be completely scratched from the tax code.

What to fix? Federal budget or housing mess?

Doing away with the mortgage deduction entirely would benefit the federal budget to the tune of about $100 billion per year. But it would also lead to a temporary disruption in housing values, because buyers would have to reduce their home buying budgets accordingly. Since the federal budget and the housing market are both out of whack, it's tough to justify either end of the issue.

Critics of the new proposal argue that there's no escaping the negative impact on housing, even when the change only affects high-income households.

California, New York homeowners will pay

Another complication associated with the new budget proposal is how it will disproportionately affect residents in California, a state that wholeheartedly supported Obama in last November's election. It's estimated that 2 percent of all taxpayers will be affected by the mortgage deduction change; but one-sixth of those affected reside in California. This amounts to about 500,000 households, including many people who live modestly. Because the Golden State's property values are so high, an annual income of $250,000 in California doesn't equate to the lavish lifestyle typically associated with the upper class. In other words, some California households will feel the pinch if the mortgage interest tax deduction is reduced.

The state of New York is next in line, with an estimated 250,000 affected households.

Real estate groups, including the National Association of Realtors, the National Association of Home Builders, and the Mortgage Bankers Association, are expected to lobby fiercely against the proposed change.

Published on April 19, 2009