Taxes, Taxes, Oh Those Persistent Taxes: Second Home Levies (Again!)

STATEWIDE — Call it cliché to identify taxes as one of life’s two guarantees, but hey, the act of transferring personal income to the government also functions as a source for steady content, be it as a news report or editorial column. There will never be a shortage of tax stories to write about or discuss for as long as media exists. In this go around of Standing Watch we look ahead to the state of taxation in California for 2018 – particularly with respect to proposals to eliminate second home tax benefits.

A lawmaker from San Francisco proposed Assembly Bill 71 (AB 71) in December 2016. The bill, which didn’t progress far during the 2017 legislative session in Sacramento, would have eliminated second home tax benefits altogether in the name of raising funds for affordable housing initiatives.

Boats qualify as a “second home,” particularly for anyone whose vessel is not a primary resident. Boat owners who primarily live in a terrestrial residence, accordingly, would not be able to deduct their respective vessels for tax purposes, should AB 71 become law.

“California law allows taxpayers to deduct the mortgage interest paid on up to $1 million in debt for a principal and second residence. A second residence is limited to a home that is either not rented out at any point in the year or one that the taxpayer can rent out but must also live in for part of the year,” a legislative analysis of AB 71, conducted in June, stated.

“Taxpayers can deduct mortgage interest from both their federal and state tax liability. According to the Franchise Tax Board (FTB), the mortgage interest deduction resulted in approximately $5 billion in revenue loss for 2016-17,” the legislative analysis continued.

Legislators could reconsider AB 71 during the next legislative calendar, which launches in a few weeks – meaning boaters dodged a bullet in 2017 but will again have to worry about the prospect of being taxed for owning their boats once 2018 arrives.

This, of course, parallels a similar proposal in Washington, D.C., were the House of Representatives sought to do away with second home tax deductions.

Second home tax deductions have certainly been a benefit for boat owners, so the parallel state and federal proposals to do away with the deduction is certainly a bright blip on the boating community’s radar.

Boating and fishing advocacy groups such as Recreational Boaters of California and California Sportfishing League have campaigned against AB 71 during its initial run through the legislative process. It’s unclear what influence, if any, boating and fishing lobbyists had on the failure of AB 71 to make it to Gov. Jerry Brown’s desk before the end of the 2017 legislative session, but the bill’s advocates will have another chance to move it forward once the calendar flips the page to 2018.

So what did AB 71 propose to do, specifically?

Assembly member David Chiu’s bill would have eliminated the ability to use mortgage interest payments on qualified second homes as a deduction on state income tax. All taxes collected on such mortgage interest payments, broadly speaking, would have used to fund the state government’s affordable housing initiatives.

Just how widespread is the second home mortgage tax deduction here in California?

The Franchise Tax Board stated about 4.2 million taxpayers, on average, claimed the mortgage interest deduction annually. Roughly 5 percent of California’s taxpayers, according to federal data and the Assembly’s most recent legislative analysis, use the deduction on a second home – which comes out to a little less than 200,000 taxpayers.

Those claiming a second home mortgage interest deduction generally experience a tax savings of $928, according to the Federal Tax Board and AB 71’s legislative analysis – or roughly $200 million in revenue not going into state coffers.