Realtors, Brokers Decry Reducing Homeowners' Tax Benefits

Realtors and mortgage brokers decried recommendations by a federal tax reform commission to reduce some tax benefits now enjoyed by homeowners, saying they discourage homeownership and endanger the national economy.

But there is not unanimous agreement among tax and housing professionals on how deeply, if at all, the reforms would harm homeowners or the housing industry.

The industry enjoys a disproportionately favorable treatment under the tax code, according to a Nov. 1 report by the President's Advisory Panel on Federal Tax Reform, the culmination of 10 months of work to simplify the federal tax code. Housing was just one of many issues recommended for reform.

Tax benefits for homeownership go largely to the nation's wealthiest citizens, with more than half of the estimated tax expenditure for home mortgage interest deductions flowing to the 12 percent of taxpayers who had cash incomes of $100,000 or more last year, the report said.

The tax preferences that favor housing exceed what is necessary to encourage home ownership or help more Americans buy their first home, the report said.

Currently, homeowners can deduct from their taxes interest paid on up to $1 million of mortgage debt on a first or second home, according to the report. Homeowners can also deduct interest on home equity loans of up to $100,000.

The panel recommended eliminating tax deductions for second homes as well as replacing deductions on first homes with an across-the- board Home Credit equal to 15 percent of interest on a principal residence.

The panel would also limit the Home Credit based on the average cost of housing within the taxpayer's area, changing current limits of $1 million to between about $277,000 and $412,000.

Realtors nationally argue that such limits would cost the typical homeowner up to $30,000 in equity.

The result would dampen homeownership, said Alan Ingraham, president of the Maryland Association of Realtors.

It would also cause residential property values to fall by 15 percent, according to statistics from the National Association of Realtors.

Many people have utilized real estate to establish equity for themselves, which is no longer there from a pension fund, Ingraham said.

Company pension plans are becoming increasingly sparse, Ingraham said, making personal property values even more important to Americans reaching retirement age.

With the aging of America, that is something they should be extremely concerned about as well, Ingraham said.

In Maryland, the housing industry comprised 14.2 percent of the total gross state product, Ingraham said. Nationally, that number is about 15 percent, he said. A crash in the housing industry could likewise crash the economy, he said.

Christopher Scott, a tax attorney for Baltimore-based Gordon Feinblatt Rothman Hoffberger & Hollander L.L.C., agreed that the proposed reforms would be detrimental to national housing, although he did not share the Realtors' doomsday scenarios.

It will mean that a few more people will be unable to afford their own homes, but I don't think it would be a dramatic shift, Scott said.

I think what would happen is that the cost of housing would go down a bit because people would be less able to afford mortgages, he said.

But the presidential panel argued that the reforms would actually save more low-income earners money on mortgage interest, noting that only 54 percent of taxpayers paying interest on their mortgages receive a tax benefit.

Under the new proposal, millions of Americans would be able to claim a tax benefit for home mortgage interest for the first time, which would make owning a home more affordable, the report said.

The panel seems to really keep going back to this idea that the homeownership benefit should exist, but it should be shared more evenly, said Linda Couch, the coalition's deputy director.

I think that many lower-income households do not itemize their tax deductions and are therefore not aware of the benefit they are missing out on, she said.

The Treasury Department will review the panel's recommendations and come up with a final plan that the president is expected to push in Congress next year.

Scott doubts the mortgage reforms in particular would pass as law.

Ultimately, I think this is a political nonstarter, Scott said.

Tax benefits for homeowners are very popular with voters, he said.