Assemblymember Alex Lee Introduces Legislation to Repeal Mortgage Interest Deduction on Second Homes

Assemblymember Alex Lee has introduced legislation to repeal a tax break for vacation homes, so the state can access millions in revenue to stop cuts to essential services and programs that vulnerable Californians rely on. 

AB 2616 authored by Assemblymember Lee repeals the Mortgage Interest Deduction (MID) on second homes. This tax break mainly benefits wealthier Californians by allowing them to write off their mortgage interest on their second residences. 

“California is subsidizing vacation homes when hard working residents are struggling to pay rent or buy a home,” said Assemblymember Lee. “Even as poverty and homelessness are on the rise, critical programs like affordable housing and social safety net programs are on the chopping block of the Governor’s proposed budget. In the face of a serious budget deficit, we have to seek equitable revenue solutions like repealing the Mortgage Interest Deduction on second homes, which only benefits roughly 0.4% of Californians.” 

An analysis by the Franchise Tax Board estimates that approximately 175,000 Californians benefit from the MID on second homes in the 2016 tax year, and the subsidy costs taxpayers $230 million annually. If the MID on second homes is discontinued, wealthier-than-average Californians would owe about $1,000 more in taxes annually.

MID was federally instituted in 1913. During this time, owning property was less common, and most people who purchased homes paid upfront rather than taking out a mortgage. This broad tax subsidy reduced the upfront cost of housing for borrowers.

A few decades later when homeownership expanded to middle-class suburbs, MID was adopted at the state level to increase homeownership. But state tax forms do not differentiate between primary and secondary residences for MID, leading to vacation homes being subsidized by the state budget. 

In February 2024, the Legislative Analyst's Office released an estimated budget deficit of $73 billion due to declining revenue projections. In response to California’s budget problem, the Governor’s proposed budget for FY 2024-25 includes sweeping cuts to a variety of programs to fill the gap. It includes reducing $293 million in ongoing funding to the California Work Opportunity and Responsibility to Kids (CalWORKs) program, among other key welfare programs. The budget also proposes $1.2 billion in cuts to affordable housing programs. 

At the same time, the Governor’s proposed budget raises just $400 million by closing tax breaks, which is less than 1% of his proposed budget solutions, according to the California Budget & Policy Center. Repealing the MID on second homes would allow the state to re-allocate hundreds of millions of dollars annually to provide additional funds to the state budget.