Proposed Bill Would Remove Deductions from Secondary Homes to Fund Homeless Programs

Vacation homes, rental homes, and other types of secondary housing would lose their mortgage interest deductions (MID) to fund new statewide homeless initiatives under a new bill announced Thursday.

AB 1905 and the end of MID tax breaks

Assembly Bill 1905, authored by Assemblyman David Chiu (D-San Francisco), would create the Housing and Homelessness Response Fund, which would be funded by the approximately $400 million worth of secondary home MIDs. Currently less than 400,000 Californians use the MID deductions on vacation homes and home mortgages, saving on average $750 to $1,000 a year.

In a state of 40 million, only 175,000 Californians utilize the MID tax break on vacation homes saving an average of $1,000 per year, and 224,000 Californians claim the tax break on primary home mortgages acquired in 2018 or later over $750,000 saving an average of $750 per year. But as some Californians own several or even dozens of houses that qualify as a MID tax break or use it to deduct interest off mortgages from their tax debt, deductions can sometimes reach as high as seven figures for a single person.

Assemblyman Chiu has been vocal when it comes to homelessness, with his home city of San Francisco ranking as one of the highest homeless saturated cities in the country. Bay Area property owners using one out of every 5 available open homes as temporary stay locations instead of permanent housing has also been called out on being a factor in the current homeless crisis, as well as the statewide housing crisis.

A ‘moral’ issue

For AssemblymanChiu it also comes down to being a moral issue.

“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,” stated Assemblyman Chiu on Friday. “Eliminating this tax break to create a permanent source of funding to address our homelessness crisis is simply the moral thing to do.”

Assemblyman Chiu also pointed out in a press release that California has over 150,000 homeless people on a given night, increasing by 17% in a year. In addition, Chiu claims that MIDs cost California $4.2 billion in tax revenue each year, either from the deduction itself, taxes permanent residents would bring, more spending that would occur with permanent residents, as well as several state and local tax benefits.

Potential issues with AB 1905

While AB 1905 has received praise from many Bay Area lawmakers, housing advocates, and homeless advocates, potential issues of the bill have been pointed out by critics.

“This bill is very widespread,” said housing expert Oliver Ward. “In urban areas having so many homes like this helps reduce congestion, eases the burden of local services, and in the cases of second homes and apartments being rented out or used as an Airbnb, they give alternatives to larger families or those on a budget who want to vacation in a city.

In more rural areas, this ensures that usually hard to sell homes have an owner are are kept up. A lot of rented cabins are second and third homes to other people, and this brings in tourists to areas that depend on them opposed to them remaining vacant.

The MID break to some people is a ‘tax on the wealthy’, and I will grant that many people who own a second or third home are more wealthy.

But there are also many who inherited a second house and are renting it out to just pay the bills. To some Airbnbing a second home is all they can do for money.

This potential new law can’t just be a blanket law. Everyone has a different circumstance here. There’s a big difference between a celebrity owning houses in Beverly Hills and Napa and a retiree renting out a cabin that they can’t sell to pay the bills on their primary home.”

AB 1905 will be joined by several other bills increasing homeless funding in Assembly and Senate subcommittees in the next few months.