Every once in a great while, the lines between Real Estate and Education blur. For example, putting a parcel tax on the local ballot to fund your local school district’s budget shortfall has been a hot ticket item for many localities over the last year. Once again real estate and education cross paths as congress fires up discussions regarding possible elimination of the mortgage interest deduction as a means of addressing the burden of the federal budget deficit.
As many of you know, owning a home has concrete tax advantages. The United States is one of the few if not only countries in the world that allows taxpayers to use mortgage interest as a way to reduce their tax responsiblity. This deduction has been instrumental in supporting a healthy housing market, including single family homes and investment properties. Yet once again the mortgage interest deduction has found itself in the crosshairs of a congress starving for ways to reduce the ever-growing federal deficit.
From the outside looking in, I can see why congress would want to consider this. And for the millions of people who don’t currently pay mortgage interest, the idea of reducing or eliminating the MID seems all well and good. Congress and the President Obama’s Fiscal Deficit Commission are throwing around some pretty hefty numbers in terms of deficit reduction if the MID is eliminated in part or even in full.
It would also be of little secret that the National Association of Realtors opposes this idea. I won’t lie to you, Realtors like myself have vested interests in the success of the real estate market. The last thing the real estate community wants is to see is a drop in the sales volume and median home price. However, if the mortgage interest deduction is eliminated, it is clear that the demand for home ownership will wane.
I believe Congress, and those who support the elimination of the MID, are well meaning but are missing the big picture. Eliminating the MID has very direct consequence on every home owner who pays a mortgage. It will also have a direct effect on home prices and sales as well as real estate investments and those who own condos or PUD’s. I mean, let’s face it. Who would ever consider purchasing a condominium without the benefits of the mortgage interest deduction?
But back to my point. There are also severe indirect consequences of MID elimination that congress may not be thinking about. On December 8th I watched as the San Bruno Park School District board discussed how they were going to address what appears to be a 4.9 million dollar shortfall in the current budget. The majority of the shortfall is a result of declining property tax revenue. For those who may not know, a large portion of a district’s revenue are tied directly to property tax revenue. Declining property values result in declining property taxes and ultimately mean less money for school districts.
So the formula as I see it is simple. Eliminating the MID will result in less demand for home ownership. Less demand for home ownership results in declining property values. Declining property values result in declining property tax revenues. Declining property tax revenues equal less money for school districts.
So, even if you don’t own a home or pay a mortgage, schools in the SBPSD receive less money. As a parent or a student, you get the added benefit of watching the SBPSD play yet another round of “Spin the Wheel of Reduced Education Services and Capital Improvements”, a game that has become all too well-known in our school district and others across the state.
But there’s more. If you own a home or multi-unit investment, you also know that home prices and rents are in part influenced by local schools. So underperforming schools have a direct impact on home prices and rental income whether or not you use the MID as a means of lowering your tax base. So ultimately, your home or your investment will be worth less money.
And don’t even get me started on how the further decline in property values will affect a San Bruno real estate market that is just starting to see a decline in distressed properties.
I’m imploring Senators Barbara Boxer and Dianne Feinstein to consider this when discussing the elimination of the mortgage interest deduction. Are you?
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Filed under: Buyer's Blog, Realtor Trends, Seller's Blog, buyer, buyers, mortgage interest tax benefits, tax benefits of home ownership, tax benefits real estate
Joe Capote 
Joe, you know so much and this is your world: education and real estate. Can you help me understand what is means to be basic aide..if it’s just based on tax revenues, then why would declining enrollment make a different to the San Bruno budget? From what I read, declining enrollment was one listed factor in exacerbating the budget shortfall or am I completely misunderstanding? If San Bruno received money based on student enrollment, then that would matter? Can the district receive both ways or is it one way or the other?
From what I understand, the ADA (Average Daily Attendance) does not make that much difference to a basic aid district in trms of money received. Honestly the argument of declining enrollment did not make much sense to me or the other board members, especially for incoming kindergarteners. Now, while changes in the ADA do not affect unrestrcted revenues they do affect categorical income. Perhaps that is what the district is alluding to. I need to dig into the budget packet, which is several pages.
The state’s education funding model is strange indeed. School districts have to continually calculate their revenue entitlement under both systems–if property taxes total less than the basic funding level guarantee, the state makes up the difference with the amount per average-daily-attendance. But if the property tax for the community comes up higher, the district can keep the difference (the Basic Aid model). Sounds great to be in Basic Aid, but the state has imposed the same cuts to Basic Aid districts at Revenue Limit district under a “Fair Share” set of cuts. Districts right on the edge of the two funding models get slammed, even though people assume all Basic Aid districts are wealthy. Basic Aid districts tend to not accept students from outside their boundaries because the bump in attendance doesn’t really add to their revenue. I hope this helps.