President Barack Obama's budget threatens to cut a benefit many Americans view as practically a right — the mortgage interest tax deduction — and powerful real estate interests are fighting back.

The move would affect only households earning $250,000 or more, but opponents say it could prolong the housing crisis by slowing already torpid home sales and deal a another blow to home values ravaged by the market crash.

"Even though the intended impact is on the top 2 percent of households, the unintended consequence will be a reduction in home values for homeowners across the country," said Lawrence Yun, chief economist for the National Association of Realtors.

The Realtors' group contends that the loss of the tax break will lead high-income homebuyers to spend less on homes, which would eventually drive down prices at the high end. And if mansions cost less, modest bungalows will ultimately see their values fall as well, Yun contends.

The odds of that happening may be greater in California, where about 500,000 tax filers who claim the mortgage interest deduction earn enough to be affected by the proposed cut, the Realtors' association says.

The National Association of Home Builders and the Mortgage Bankers Association were also quick to oppose the Obama proposal.

The president's budget plan doesn't target the mortgage interest deduction directly; instead, it caps the rate of all itemized tax deductionsfor the wealthy.

Under the budget plan, households subject to 33 percent and 35 percent rates would only be able to claim deductions at a 28 percent rate. So for every $1,000 in deductions, a top-bracket household would save $280 in taxes, down from $350.

Current law eliminates the deduction for mortgages of $1 million or more, and that limit would remain. If approved by Congress, the new rules would go into effect in 2011.

Richard Green, director of the University of Southern California's Lusk Center for Real Estate, said the Obama proposal — which he supports — may well be "sort of the nose under the tent on the way to getting rid of the mortgage interest deduction entirely."

In the U.S., the home mortgage write-off is used by about 35 percent of taxpayers who itemize their deductions, generally a more affluent group. Roughly 90 percent of taxpayers who earn more than $100,000 itemize deductions, while about 18 percent of those earning less than $50,000 do so, according to the Tax Foundation, a nonpartisan educational group.

A Realtors' association analysis of Internal Revenue Service data found high-income taxpayers who claim the mortgage interest deduction comprise about 2 percent of tax filers. But a disproportionate number — about one-sixth — are in California.

More than 500,000 Californians would be affected by the Obama tax change, by far the largest total among the states. New York is in second place with about 250,000 high-income filers who claim the mortgage interest deduction, the Realtors' analysis shows.

"This is aimed at California and New York," said University of California, Berkeley, economist Kenneth Rosen, who has studied the interest deduction. "The problem with this is households earning more than $250,000 in New York or California may not be what we call wealthy."

For those families, the extra few hundred dollars a month in taxes could be painful, Rosen said. A better way to trim the deduction, Rosen said, would be to index it regionally based on home values. That would allow more people in high-cost areas to still get a deduction.

Fear that the Obama proposal could lead to future cuts to the deduction is a major concern of some opponents, said David Kissinger, director of government affairs for the South Bay Association of Realtors a Los Angeles County group.

"If today it's households earning $250,000 who will pay more, does it mean tomorrow if they still need to balance the budget it will be those making $180,000, then $160,000? How often is the government going to go back to the well?" he said.

(News of the possible reduction in the tax break has shocked some Americans raised on the notion that a home purchase comes with a tax break.

Californian Michael Newman, 34, a plastic surgeon who is now shopping for property in Hermosa Beach and Manhattan Beach, said he opposes reducing the deduction because he thinks home buying should be encouraged by the tax code.

Newman said he'd rather see a tax on luxury cars, or even higher income taxes for the wealthy, including himself.

"I hate to say it's reasonable to raise taxes for people like me, but I think it's reasonable. We're at a time in which the government needs more money, and it's only fair that people who make more contribute more," he said.

Los Angeles economist Christopher Thornberg believes that because the Obama proposal is aimed at such a small group, it's not likely to move the overall housing market.

"Big whoop," he said of the plan's likely impact. "It would be so small as to be irrelevant."

Infobox1
President Barack Obama's budget proposes reducing the mortgage interest tax deduction for households earning $250,000 and up. Some basic facts of the proposal:
-- Reductions would begin in 2011.
-- The deduction would be capped at 28 percent. Currently, affected households can deduct their full 35 percent tax rate.
-- U.S. homeownership rate: 67.5 percent.
-- Canadian homeownership rate (Canada has no mortgage deduction): 68.4 percent.
Sources: White House, U.S. Census Bureau, Statistics Canada.

Taken From MercuryNews.com