Could it be the end of the McMansion?

On January 7, 2005, President George W. Bush wrote an executive order to create an Advisory Panel to submit a report to the Secretary of the Treasury which will "simplify Federal tax laws to reduce the costs and administrative burdens of compliance with such laws, among other purposes including recognizing the importance of homeownership and charity in American society."

But this subtle directive may get thrown out as the panel comes back with a recommendation to scale back or possibly eliminate the mortgage interest rate deduction for homeowners.

Due to Hurricanes Katrina and Rita, the tax reform panel postponed its September meetings to October, and has been delayed in rendering its findings. An executive order was written extending the panel's report deadline to November 1, 2005.

One postponed meeting was held this Tuesday, where the tax reform panel was found to be seriously considering the roll back or elimination of two popular tax breaks -- home mortgage interest rate deductions and employer-paid health insurance. No firm decisions were made and another meeting will be held on October 18, 2005.

It's not too late to send comments and concerns to the panel, of which there are many.

According to news reports, including The Los Angeles Times, the panel "tentatively agreed to recommend a substantial reduction in the limit on mortgage interest that homeowners can deduct from their taxes." Californians are concerned because the median home price in the state -- where one out of nine Americans live -- is already well over a half million dollars. Others are concerned that a cap on mortgage interest rate deduction could lead to an elimination of the benefit for all homeowners.

The reason the panel is looking at homeownership and healthcare is because it also seeks to recommend the elimination of the alternative minimum tax created in 1969 which disallows many deductions to wealthy taxpayers. As inflation has risen with the years, the tax is impacting more and more middle-class taxpayers as well as the wealthy.

The elimination of the alternative minimum tax, the panel estimates, could cost the federal government approximately $1.2 trillion in revenue over a 10-year period. Those revenues would have to be made up which is why the panel is looking at other cutbacks to simplify the tax code in keeping with President Bush's directive. The panel, said the Times, offered "no estimate of the revenue to be gained by scaling back the mortgage deduction," but "according to the White House, abolishing it outright would fall somewhat short of $1.2 trillion."

The problem with the possible loss of these deductions is that it would hurt taxpayers in two of their most vulnerable areas -- nearly 70 percent of Americans own homes. Healthcare is a hot-button issue with all workers, not just the wealthy, and higher costs could seriously hurt productivity and individual solvency as workers struggle to avoid going to the doctor.

According to panel member James Michael Poterba, associate head of the economics department at MIT, the top 2.2 percent of tax returns claim 22 percent of the benefits from the mortgage-interest deduction, and disproportionately benefits those who itemize. In 2002, only 46 million taxpayers itemized out of 130 million tax returns that were filed.

USA Today interprets the panel's suggestions that the tax breaks "would be lost mostly by employees with generous health insurance plans and homeowners with expensive mortgages. But key details remain to be worked out."

The main key detail to be worked out is where it ends -- with all homeowners? With all employer-paid health insurance?

One idea the panel is putting forward is replacing the mortgage interest rate deduction with a tax credit so all homeowners would benefit. Another is reducing the size of the mortgage that deductions can be taken.

Suggests David Reed, author of Mortgages 101, "If you have a 30-year mortgage of $150,000 at six percent, you can currently deduct all of it. There's almost $9,000 in mortgage interest ($8,949) deduction for the first year, and that can be deducted from the taxpayers income before income tax is calculated."

"If the mortgage interest deduction is eliminated supposedly that is supposed to be offset in other areas either by a flat tax, or a sales tax," he says. "But I don't see the mortgage interest deduction being eliminated unless it was an "in your face" obvious advantage to do so. Let's not forget what's been driving the economy for the past few years ... real estate.

"If an offset were proposed that either eliminated the need for a mortgage interest deduction or essentially made it a moot point," he concludes, "then I don't see a home being more or less expensive. I believe home ownership isn't driven by the mortgage deduction ... I believe it's driven by the idea of owning. I may be wrong on that, but I doubt it."

While some say the mortgage interest rate deduction has added to overbuilding, in the case of the McMansion trend, others say it's a financial benefit for all homeowners.

Poterba says the panel will be careful to suggest that changes be phased and that current homeowners be "grandfathered" so as to avoid upsetting the current housing market or harm current homeowners.

Published: October 13, 2005

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Blanche Evans is the award-winning senior editor of Realty Times, the Internet's leading independent real estate news service. She is featured daily on the Realty Times Video Network in the "Realty Viewpoint" segment. Blanche has been named one of the "25 Most Influential People In Real Estate" by REALTOR Magazine, and has been twice recognized as a "notable." In 2005, she was named "Top Reporter Covering the NAR" by Delahaye-Bacon's. Blanche is a renowned author of five real estate books. Her newest, Bubbles, Booms and Busts: Make Money In Any Real Estate Market, McGraw-Hill, was rave-reviewed by The New York Times. She was also selected from hundreds of real estate experts to contribute to Donald Trump's book, Trump: The Best Real Estate Advice I Ever Received: 100 Top Experts Share Their Strategies, Rutledge Hill Press, and is featured on page 68. Order Now Review - Honors In 2006, Blanche was selected among scores of candidates to author two consumer real estate guidebooks for the National Association of Realtors: The NAR Guide to Home Buying, and The NAR Guide to Home Selling, Wiley & Sons. She is currently planning two new books for the NAR and its members.       Known for her keen insight into real estate industry issues and for her ability to make complex subjects easy to understand, Blanche is a sought-after keynote and continuing education speaker. Real estate organizations from MLSs, to brokerages, to franchisors, to associations hire her to provide up-to-the-minute analysis of real estate industry news and advice on how to improve revenues. Her passionate delivery, peppered with stinging wit, is a huge hit with audiences and fans. Don Klein, CEO Greater Nashville Association of Realtors, Blanche Evans, Richard Courtney, president 2007, GRAR "The GNAR membership meeting last week featured Blanche Evans as the keynote speaker. Her comments and insights resonated extremely well with those in attendance and we have had many requests for copies of her PowerPoint Presentation. She was a terrific part of the membership meeting and convention program!" - Don Klein, CEO Greater Nashville Association of Realtors Coverage from WSMV, Nashville - 8-14-2007 That Interview Guy - Get Inside The Head Of Today's Generation 2007 AE Institute Session - To purchase 2006 AE Institute Session - Parts 1 2 3 4 5 6 7 8 9 HouseValues Mastermind call - Parts 1 2 Blanche's fireside chat with Jeremy Conaway, HAR - Click here. To contact Blanche, email her at . For more articles by Blanche, click here.