Wednesday, 26 July 2017

Industry Fears Loss Of The Mortgage Interest Rate Deduction

Written by Posted On Wednesday, 02 November 2005 00:00

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.

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Blanche Evans

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