Are the Tax Benefits of Home Ownership on the Chopping …
Are Popular Tax Benefits of Home Ownership on the Chopping Block?
May 2013
There has been a lot of talk about 2013, or, more realistically, 2014 being the year for comprehensive tax reform. One deduction that will likely get a lot of attention in this conversation is the mortgage interest deduction--a popular but heavily criticized deduction. The House Committee on Ways and Means in fact met late last month to consider the deduction, as well as other housing-related tax provisions.
BACKGROUND
Taxpayers who itemize (vs. claiming the standard deduction afforded all taxpayers) can deduct their mortgage interest on up to $1 million of qualifying acquisition debt on a qualified principal and, if applicable, secondary residence. Many consider this deduction to be a reduction of the after-tax cost of financing a home.
The Code contains a number of housing-related tax provisions designed to promote home ownership, including the mortgage interest deduction, property tax deduction and exclusion of gain on the sale of a principal residence. The financial impact of all of these is being considered as part of tax reform discussions.
Are Popular Tax Benefits of Home Ownership on the Chopping Block?
May 2013
Financial impact These incentives are considered tax expenditures, in that they provide benefits to taxpayers without a direct financial outlay by the government, and their "cost" is essentially in the form of forgone revenue.
According to the Joint Committee on Taxation's "Estimates of Federal Tax Expenditures for Fiscal Years 2012-2017," these home-related provisions carry the following costs:
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Estimates from 2010 indicate that 3% of the tax benefits from the mortgage interest deduction go to taxpayers GBNJMJFT
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BOEHP taxpayers (families) with incomes above $100,000.
Weighing the merits of the mortgage interest deduction The mortgage interest deduction is often criticized as supporting a regressive tax regime, providing a greater benefit to taxpayers with higher incomes.
Proponents of the deduction argue that it encourages home ownership and makes it affordable to taxpayers who would otherwise not be able to own a home. Still, critics claim that instead the deduction actually encourages more affluent taxpayers who likely would have purchased a home anyway to buy larger homes and take on more debt than they otherwise would.
Reform prospects 8BZTBOE.FBOT$PNNJUUFF$IBJSNBO%BWF$BNQ (R-MI) indicated recently that the Committee is doing a "top to bottom" review of the Code as it looks at comprehensive tax reform. He stated that "home PXOFSTIJQJTBOJOUFHSBMQBSUPGUIF"NFSJDBO%SFBN
and the tax code has long provided a variety of incentives to make it easier for families to buy and own a home. Before considering any proposal, the Committee must better understand how tax reform might affect the housing sector."
Given the popularity of the mortgage interest deduction and how long it has been in place, it seems unlikely that it will be repealed outright. But there are a number of ways that it could be modified rather significantly.
Many proposals involve converting the existing mortgage interest deduction to a credit. These include:
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with no credit for a second residence or for home equity.
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with no credit for second homes. Interestingly, the credit would be claimed by the lender, not the borrower, and would effectively reduce the borrower's interest rate.
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with the mortgage limited to the average regional price of housing.
Proponents of transitioning to a mortgage interest credit contend that a credit benefits non-itemizing home owners, and it would generally provide a greater benefit to lower-income taxpayers. This would in turn be better aimed at the goal of making home ownership more affordable for people who need a boost, and it would likely be claimed by a greater number of taxpayers than the current deduction.
President Obama's 2014 budget proposal, as well as several of his earlier year budget proposals, would cap itemized deductions, including mortgage interest, for UBYQBZFSTJOUIFUPQUISFFUBYCSBDLFUT
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Other tax reform considerations Although most attention is paid to the mortgage interest deduction, the other real estate provisions mentioned above (property tax deduction and exclusion for gain on sale of principal residence) would also likely be part of any comprehensive reform efforts.
As mentioned above, under President Obama's 2014 budget, itemized deductions, including the deduction for property taxes, would be included in NBYJNVN6OEFSUIF4JNQTPO#PXMFTBOE 3JWMJO%PNFOJDJQMBOT
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Are Popular Tax Benefits of Home Ownership on the Chopping Block?
May 2013
The precise effect of any of these changes on taxpayers, or on the real estate market in general, is uncertain. The Ways and Means hearing may provide some guidance on this issue. However, it is generally agreed that, for individuals, the effect would be greatest on higherincome taxpayers.
What can we expect? While most everyone agrees that simplification of the Code is important, these home ownership provisions make them a rather unpopular target. Buying a home carries tremendous economic and personal significance
to taxpayers, not to mention that it drives many aspects of local and national economies. Any efforts to reduce or eliminate these incentives could strike a negative chord with taxpayers who own or hope to one day own a home.
However, given the significance of the national deficit and the extremely complicated nature of the Code, lawmakers are looking at these provisions in the context of overall tax form. The fact that groups like The House Committee on Ways and Means are meeting on this specifically could indicate their openness to serious discussion about modifying these provisions.
Asheville Marion Boone
828.254.2374
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