Mortgage Tax Deductions Vary Widely By Region

The federal tax benefits for home ownership are some of the biggest andmost popular of any in the IRS tax code, writes syndicated real estate columnist Kenneth Harney.

How much are we talking?

• An estimated $81 billion for mortgage interest write-offs.
• About $15 billion for local real estate / property taxes.
• Another $24 billion for capital gains exclusions this year.

But who really capitalizes on these tax-code savings? Who gets to write off the most? New research offers insight into the billions of dollars in annual interest and property tax deductions flow, state by state, district by district. Research conducted by the National Association of Home Builders using 2003 data (the latest available) provided the following findings:

Homeowners in a single congressional district in California, the 14th District in Silicon Valley, took more in mortgage interest write-offs than all the residents of six whole states combined, claiming $3.2 billion in mortgage interest deductions during the year covered by the study. By comparison, $2.9 billion in write-offs were recorded by residents of Vermont, Wyoming, Alabama, North Dakota, South Dakota and West Virginia. The average write-off in that particular California district was $35,000, compared with an $9,500 average nationally.

Florida taxes, and the deductions stemming from them, rank high but not among the nation’s loftiest. Similar to the California example above, residents of a single congressional district on Long Island wrote off more in property tax deductions than all the homeowners from six states and the District of Columbia. Owners in New York’s 3rd District took an estimated $1.25 billion in deductions, more than the $1.2 billion claimed during the same period by people in Hawaii, Wyoming, Arkansas, Delaware, North Dakota, South Dakota and D.C.

The average New Jersey homeowner claimed $6,005 in real estate tax write-offs, more than five times the average deduction by residents of Hawaii, who claimed $1,126. New Yorkers claimed an average $5,181 in property tax deductions, followed by the residents of New Hampshire at $4,830, Illinois at $4,129, and Vermont with $3,845. The average California homeowner wrote off $14,217 in mortgage interest taxes, while the average homeowner in Oklahoma wrote off $5,710.

The study toted up the mortgage interest tax deduction savings and local real estate taxes for all 435 U.S. congressional districts and 50 states, the purpose of the project being to show representatives just how economically significant current homeowner-related tax write-offs are to their constituents. Although currently there are no legislative threats to the mortgage interest tax and real estate benefits, their size and geographic distribution make them perennially tempting targets for budget balancers seeking to bulk up the federal tax rolls.

The mortgage interest write-off, available to owners with primary Florida home loan balances of up to $1 million and $100,000 in home equity debt, is expected to cost the U.S. Treasury close to $100 billion a year by 2009. If the deductions were capped at a level below today’s $1.1 million - say at $300,000 or $400,000 — the federal deficit could be reduced by tens of billions a year.

A low cap would also lessen the system’s disparities between the tax benefits received by residents of states with high housing costs and big home loans compared with the benefits received by residents of lower-cost jurisdictions. But defenders of the current system (the National Association of Realtors among them) argue that the disproportionate write-offs are attributable to the indisputably different realities of owning a home from one state to the next.

Proponets of the system assert that every housing market is different, too much so to alter the code. For example, California, New Jersey and New York residents get to deduct more for local property taxes and mortgages because they pay higher taxes and monthly loan payments than people who live elsewhere. Their governments rely more heavily on tax revenues to run schools and services, and they pay a lot more in terms of median home prices than most of the U.S.

Bottom line: If you’re not taking big deductions, that’s probably because you’re not being eaten alive by huge monthly Florida home loan payments and heavy property taxes. So it could be worse.