The possibility of mortgage "reform" is live and living, with test balloons already being floated in Washington. The President's Advisory Panel on Federal Tax Reform must present its findings at the end of the month and there are no conditions under which they will suggest more benefits for homeowners.

The idea of real estate tax "reform" is to reduce, shrink and curtail current mortgage and real estate write-offs. Assuming that the Commission recommends any home-related changes to the tax code, those changes will not be in your favor. The good news is that the Commission's real estate recommendations -- if any -- will be ignored.

To understand what's happening it's best to start with the reality that the federal budget is wildly out-of-whack.

According to the nonpartisan Congressional Budget Office, in fiscal 2000 the government hauled in an extra $236 billion followed by a surplus of $128 billion in fiscal 2001. Since then, it's been all downhill -- a loss of $158 billion in fiscal 2002, $378 billion in fiscal 2003 and $412 billion in fiscal 2004. ("Fiscal" years for the government start each October 1st and end each September 30th.)

This year there's "good" news. The original $427 billion budget deficit projected by the White House turned out to be too high. Now, says the CBO, it's expected to total a mere $331 billion.

You could look at the reduced federal budget and think that the economy must be doing well since the federal debt for the year is only increasing by $331 billion. That's sure less than $427 billion -- but it's a whole lot more than say, no deficit, and much, much less impressive than a surplus.

At this moment, some folks might think that the war in Iraq is the cause of our federal imbalance. That's simply not true. The entire cost of the war to this point is $200 or $300 billion, depending on who you ask. Given that our federal losses during the past four years have amounted to better than $1.1 trillion, there's a whole bunch of excess spending that has nothing to do with Iraq.

The problem is that we're spending far more than we take in at the federal level and that's money which must be repaid. Until it's repaid it's a loan on which we all pay interest -- thus adding further billions and billions to our budget woes.

The tax reform panel knows this and also knows something else: The federal deficit can be resolved in three ways:

• Spend less. This isn't going to happen.

• Grow the economy to produce more tax revenue -- that's what we've seen this year but the level of growth has been insufficient to catch up with spending.

• Raise taxes.

You can raise taxes by increasing rates -- and you can also raise taxes by reducing or doing away with write-offs. That's where mortgage interest deductions and the capital gains benefits from the sale of a home could be targeted.

The government could, for example, say that interest on the first $750,000 in acquisition mortgage debt is deductible, rather than current $1 million. It could say that interest on up to $100,000 in home equity financing can no longer be written off. Or it could say that home equity interest write-offs apply to something less than $100,000.

As to today's capital gains protection on the sale of a prime residence of up to $500,000 if married and $250,000 if single, the government could reduce those numbers or change the requirements -- say, for example, that owners must reside in a home for three years rather than two.

But whatever the panel says, mortgage and home profit write-offs will remain unchanged for two reasons: First, real estate activity generates a huge volume of jobs and taxes. Second, people in Congress do not favor unemployment -- especially their own.

As a country we have various disagreements, but one issue unites us all: Real estate deductions are politically untouchable. With the 2006 congressional elections coming into view, there is no possibility that any Washington official not seeking retirement will openly advocate reduced homeownership benefits.

For more articles by Peter G. Miller, please press here.

Published: September 6, 2005

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Peter G. Miller, also known as OurBroker®, is the author of six real estate books -- including The Common-Sense Mortgage -- and is the original creator and host of America Online's Real Estate Center. Peter's weekly columns appear in more than 100 newspapers nationwide, he is also published in a variety of other media outlets and he is a frequent speaker at national events and conventions. Peter welcomes your questions, comments, and news releases via e-mail at .