SACRAMENTO, CA - Assemblymember Alex Lee introduced AB 946 to repeal California’s mortgage interest deduction on secondary/vacation homes to increase access to home ownership for all Californians. Currently, California is spending approximately $250 million to subsidize empty homes to the primary benefit of wealthier individuals. The bill would re-allocate $250 million annually to provide additional funds to the California Housing Finance Agency’s MyHome Assistance Program to support first-time home buyers.
“Taxpayers are subsidizing empty vacation homes while we’re facing a housing shortage,” said Lee. “By reallocating this money to a first-time home buyer program, we foster a new generation of homeowners in California.”
The homeownership rate for Californians is the second lowest in the nation at 53.8%. The figures are worse when broken down by race with homeownership rates at 34.5% for Black people and 41.9% for Latinos. California’s history of redlining where banks and mortgage lenders rejected home loans based on race, income, and neighborhood has continued to have lasting impacts on generational wealth-building through homeownership.
The mortgage interest deduction was instituted federally in 1913. Owning property was less common then, and most people who purchased homes paid upfront rather than taking out a mortgage. A few decades later, when homeownership expanded to middle-class suburbs, the mortgage interest deduction was adopted at the state level hoping it would increase homeownership. However, as The Federal Reserve of St. Louis calculated, state mortgage deductions similar to California’s are actually regressive and inefficient, ultimately resulting in less-affordable homes. Mortgage deductions also increase the likelihood of mortgage defaults and reduces the homeownership rate by about 5%.
As a first-time homebuyer’s down-payments directly subsidize the acquisition of a home, the mortgage interest deduction is not effective at serving first-time homebuyers. By directing funds to first-time homebuyers, the state will make it easier for renters to put a down payment for their first home and fill currently vacant housing units.
According to California’s Franchise Tax Board, approximately less than 2.8% of Californians currently write off mortgage interest on vacation homes or 0.4% of California’s total population. If the mortgage interest deduction for second homes is discontinued, the wealthier-than-average Californian would owe about $1,000 in taxes annually. By directing funds to California Housing Finance Agency’s MyHome Assistance Program, and other programs that support moderate income homeownership, the $250 million could be used to create approximately 23,000 first-time homebuyers.
Finally, AB 946 would also help create better homeowner data. Currently, state tax forms do not identify a person’s primary and secondary residence to claim the mortgage interest deduction. The bill would clearly identify and split a person’s primary residence and secondary residence by 2024.
Lee has also introduced AB 387 to establish social housing to address the shortage of affordable housing production.