Posted on 11/02/2005 5:57:15 AM PST by austinite
The Presidential Advisory Panel on Tax Reform has released its recommendations on reforming and simplifying income tax laws, with the result that the real estate industry was expecting -- the panel is suggesting eliminating the mortgage interest rate deduction and giving a credit of 15 percent of mortgage interest paid to all homeowners. Currently, only homeowners who itemize take advantage of the mortgage interest rate deduction. In addition, a $1 million limit on mortgages eligible for the tax break would shrink to the average regional price of housing, ranging from $227,000 to $412,000.
This is one time that robbing the rich might not work. Home values have escalated dramatically, causing more people to borrow more money and put less money down when buying a home.
Outgoing NAR President Al Mansell, speaking at the opening session of the National Association of Realtors convention in San Francisco last week, warned the panel before they made their recommendation that cutting the mortgage interest rate deduction would hurt middle-income families the most and it could cause a housing bust of as much as 15 percent of home values.
"Eliminating the mortgage interest deduction would hurt middle-income families the most," he said. "According to IRS tax return data from 2003, 52 percent of the families who claim the mortgage interest deduction have household incomes between $60,000 and $200,000."
In addition, the typical homeowner could lose $20,000 to $30,000 in housing equity.
"Housing is the engine that drives this economy and to even mention reducing the tax benefits of homeownership could endanger property values," warned Mansell. "The tax deductibility of interest paid on mortgages is both a powerful incentive for homeownership and one of the simplest provisions in the tax code. It should not be targeted for change," Mansell said. "NAR will continue to tell Congress that Realtors® strongly oppose any attempts to alter the current tax treatment of mortgage interest."
Mansell urged reformers to look at the past -- The Tax Reform Act of 1986 proved that when the tax benefits associated with real estate ownership are curtailed, the value of real estate declines. In this case, the resulting loss of value in the commercial real estate sector was 30 percent, he said.
The current cap permitting deductions of the interest paid on mortgages of up to $1 million has not been modified or indexed since it was adopted in 1987.
"We are surprised that the panel would even consider reducing the cap," said Mansell. "Basing the cap on complex regional loan limit calculations makes no sense. In California alone, more than a dozen Federal Housing Administration (FHA) limits are in effect in various parts of the state."
The panel appears aware that its recommendations are "bold," and Treasury Secretary John Snow said he did not know what ideas the administration would embrace after the Treasury makes it recommendations.
"Now it's up to us," Snow said. The Treasury Department will "take the report, review it carefully, understand the implications and use the report as a starting point for recommendations that we will make to the President."
"The effort to reform the tax code is noble in its purpose, but it requires political willpower," the group said Tuesday in a letter to Snow. "Many stand waiting to defend their breaks, deductions and loopholes, and to defeat our efforts."
An AP report suggested that "members of the panel urged taxpayers and lawmakers to look at the whole plan, not just individual components," so they would know that "withdrawn tax breaks" would be replaced by "simpler benefits."
As the tax-writing House Ways and Means and Senate Finance committees will review the recommendations, so will the NAR. The Board of Directors has pledged to authorize a report on the financial impact of the loss of the mortgage interest rate deduction.
Yet you're a closet socialist because you believe that the purpose of the tax code is to punish success and reward failure.
They can make the transition gradual.
Britain went through this ten years ago and the effects of the reduction of the mortgage deduction were nothing compared to the normal boom-and-bust of the housing industry. House prices are in for a fall in many parts of the country anyway if we expect people to be able to afford to buy them. Why not add a change of absolute good to the process?
You stated it perfectly HostileTerritory.
A subsidy always makes things more expensive if ALL the cost factors are included. However, we know the government figures (correctly) that most of us never look that deep into the entire picture.
""Even those of us who live in modest homes will have their deduction reduced from 27% to 15%.""
This is the problem and what people knee-jerk react to without understanding. This is NOT 27% to 15%. It is eliminating the ability to recude your income by the amount of mortgage interest and adding the ability to reduce the amount of tax you owe by 15% of your interest paid. The 15% is a CREDIT. People will never get this. This is what will doom the effort. You must run your own numbers to see if you will pay more or less.....
If it's good enough for the socialist paradise of Great Britain, it's certainly good enough for the US. </sarcasm>
You are absolutely right Hildy! That would be the only fair way to do it.
To be practical, such a quantum change would have to be phased in to take into account all those investments that had been made based upon a tax code fudge factor. The phase in process must be applied, as you suggest, to the entire tax code.
typing error corrected:
""Even those of us who live in modest homes will have their deduction reduced from 27% to 15%.""
This is the problem and what people knee-jerk react to without understanding. This is NOT 27% to 15%. It is eliminating the ability to reduce your income by the amount of mortgage interest and adding the ability to reduce the amount of tax you owe by 15% of your interest paid. The 15% is a CREDIT. People will never get this. This is what will doom the effort. You must run your own numbers to see if you will pay more or less.....
A refund is the return of money to you that the government held in anticipation of your tax obligation for a year.
Part II: Most people take the tax impact into account when deciding whether to take on a particular mortgage. If the government changes the rules, then it has to do it carefully.
You are exactly correct!
I've seen my credit score tumble nearly 100 points in a year because I flipped a couple of balances to a "Zero-interest" deal.
BTW, I've NEVER been late on a payment.
Another reason they hate you. You don't give them the opportunity to heap on penalties and jack up your interest rate.
You can credit the Thatcherites for that change in British policy. And I wouldn't call the Iron Lady a socialist to her face if I were you.
Agree. And we've seen what happens to societies that do not emphasize home ownership and property rights. Since no one owns anything, values get trashed; the Tragedy of the Commons.
Repeal of Mortgage Deduction = Depression (not recession).
Guess it depends on if you're buying or selling.
A gradual change implemented over several years would be reasonable.
I live in NYC. 200k is middle class if you are just getting into the game. One can't buy a matchbox house for less than 500K.
I live in NYC and am in the process of trying to relocate my business down south. The writing is on the wall. Both parties have declared war on the taxpayer.
Ah yes, property taxes. The ripple effect of this proposal will deflate real estate values, whereby an informed property owner has no recourse but to challange the current assessed valuation of property.The assessor will be hard pressed to maintain the current level of valuation. Local government is going to suffer.Their budgets have kept pace with the inflated housing market.We should expect employee layoffs and a marked reduction in services if this ridiculous proposal is adopted. No politician who wants to remain in office will support such madness.
Probably not. I suspect there would be just as many buyers, but the prices of homes would be substantially lower. Since these homes are basically subsidized today, the removal of the subsidy will result in a decline in prices.
The second is just plain silly...you suggest that the owner of a $60k pre-fab house on a slab in a county with a tax structure that would impose a tax of maybe a grand a year should be gifted with $25k every year by the rest of us? Incredible.
No more silly than providing a similar subsidy to an owner of a $500,000 home just because he carries a mortgage on his house, while his next-door neighbor in an identical home paid cash for his.
I don't think Point #2 was a good idea, either. The other poster asked me to name some examples, so I posted a couple that immediately came to mind. LOL.
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