Now that the mid-term elections are done it's time to get on with the realities of life and some of those realities concern real estate.

Writing in the Manchester Union Leader, commentator Deroy Murdock says that "since Bush's May 2003 tax-rate reductions, total non-farm employment has expanded by 6.6 million new jobs, Americans for Tax Reform estimates. Unemployment has plummeted from 6.1 percent that month to 4.6 percent in September 2006. Average real GDP has accelerated 3.7 percent since 2003's tax cuts. Simultaneously, total household net worth has soared $14.4 trillion."

There's another side to the bright and happy news offered by Mr. Murdock: Like a night on the town underwritten with a credit card, our good times have been financed in large part with debt. During the past five fiscal years the federal debt has expanded by $1.5 trillion, money we spent but did not have.

If you say that $400 billion has gone for the war in Iraq and $100 billion was spent to re-build New Orleans, then you still have $1 trillion in federal spending that was used for er, well, duh, er ... .

It doesn't matter which political party is in office, the recent heritage of debt must be addressed. While some debt is surely acceptable, we cannot continue with massive annual deficits and not harm the economy. Moreover, the additional debt created during the past five years is not without cost. At 5 percent, the interest on our new-found additional debt is $75 billion a year. That's money not being spent on college scholarships, higher salaries for the military, universal health care, infrastructure repair or a number of other important programs.

One wonders: How can additional debt be held down, how can the current debt be reduced and how can the attendant interest cost be repaid?

• We could do nothing. Essentially the theory would be to have the expense of additional debt absorbed by an expanding economy. This might make sense if the economy expanded adequately, but the economy is not growing at a sufficient rate to make such an option realistic.

• We could print more money. This would pay off the debt -- and also devalue the currency. Interest rates would soar, meaning that fixed-rate loans could be cheaply repaid while ARMs would reach bankrupting levels for many borrowers.

• We could cut taxes, again. But this would only increase debt levels unless government was severely constricted -- the core goal of many ideologues.

• We could raise taxes.

While we would all prefer a tax-free society, that's neither practical or plausible. The bottom-line reality is that taxes will be going up and some tax breaks will be reduced, regardless of which party controls the Congress. No less important, some tax increases are likely to impact real estate.

The financial structure of our country is such that a sudden repeal of the mortgage interest write-off would substantially damage the economy. Real estate activity -- which is generally estimated to represent 20 percent of our entire gross domestic product -- would be significantly reduced if the home mortgage write-off ended. For instance, a 15 percent decline in real estate activity would result in a 3 percent drop in national output -- enough by itself to halt economic expansion and bring us near a recession.

No one, however, is seriously suggesting an end to the mortgage interest deduction -- that's a false issue. Since a government-induced recession is politically unacceptable, it's clear that the home mortgage deduction will not be ended outright.

What can happen -- and what might be politically acceptable -- would be tax code "adjustments" that impact relatively few taxpayers.

Now, for example, you can write off interest for as much as $1 million in real estate acquisition debt plus $100,000 in home equity financing. But what if deductions after January 1st were limited to the first $750,000 in acquisition financing? Interest write-offs on existing larger loans would be grandfathered in and the $100,000 home equity financing write-off remained in place?

Would you be effected? Will you need more than $750,000 to purchase your next home? The typical house, after all, is priced at $220,000 according to the National Association of Realtors.

Reducing the acquisition debt write-off would cherry-pick the taxpayer base. The luxury home market and high-cost metro enclaves would be hit, but most people -- meaning most voters -- would be fine with higher taxes on someone else.

There's also the matter of the estate tax.

Few estates now pay any tax. According to the Centers for Disease Control some 2.4 million people die each year. Of this number only 12,600 estates wind up paying taxes according to the Tax Policy Center.

Of course, obviously, the estates that are taxed today and would be taxed tomorrow are only the whales.

While some argue that there should be no estate tax, there is now a bill in Congress -- H.R. 5638, The Permanent Estate Tax Relief Act of 2006 -- that passed the House in June (269 to 156) and may well pass the Senate during the coming lame duck session. If not, similar legislation will undoubtedly be introduced after January.

Under H.R. 5638, estates of $5 million or less for individuals and less than $10 million for married couples would be untaxed, levels that would be raised automatically each year to account for inflation. In effect, H.R. 5638 automatically ends estate taxes for virtually all individuals including those with small businesses and family farms.

For estates valued between $10 million and $25 million, however, there would be a tax equal to the capital gains rate -- now 15 percent for most taxpayers. Above $25 million, the tax would be twice the capital gains rate.

The Constitution provides that "all bills for raising revenue shall originate in the House of Representatives." The House, as of January, will be controlled by the Democrats and the way bills are considered will surely be different.

Under Speaker Dennis Hastert (R-IL), the only bills considered in the current House are those with support from a majority of Republicans. This rule effectively allows the House to be controlled by a quarter of the membership. Democrats and many fiscal conservatives are frozen out.

With Hastert no longer Speaker and the rules changed after January, an alliance of Democrats and fiscally-conservative Republicans could move quickly and in a bipartisan manner to reshape the budget -- and potentially that means changes to the estate tax and, down the line, perhaps new limits on real estate write-offs.

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

Published: November 14, 2006

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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 .