Tax reform proposal would cut many real estate deductions
The recent article in the LA Times by Kenneth R Harvey spells out a compelling prediction that the mortgage interest deduction and capital gains waivers that have buoyed the spirits of homeowners for past decades will not survive the current decade.
What will that mean for homeowner values? What will it mean for the real estate market we know so well?
WHAT DO YOU THINK? We'd love to hear your thoughts.
I believe it will temporarily be dislocating for the market, bringing a brief flurry of homes coming on the market -- more in anticipation of a market drop than in disillusionment about the tax deduction -- but the market adjustment will be swift.
People still want to own their own homes.
The American Dream is for home ownership, not a tax deduction. In fact, we do not hear prospective buyers discuss the tax benefits of homeownership; it is something we as Real Estate Brokers have to bring up in conversation---often to help overcome buyer jitters.
The article says that "Even the most die-hard proponents of real estate tax benefits concede that with the right combination of lower federal income tax brackets and higher standard-deduction levels, housing's special carve-outs in the tax code would be less compelling to many homeowners."
Proposed tax brackets of 10% and standard deductions of $22,000 for couples would save most filers more than the morgtage interest deduction today.
- Alice McHugh
Excerpt of LA Times Article:
You may have seen reports about a major tax reform proposal floated recently by Rep. Dave Camp of Michigan, the chairman of the House Ways and Means Committee.
But you probably didn't see the grisly list of long-standing home real estate tax benefits that would be eliminated or sharply reduced under Camp's plan.
Here's a quick overview. But first, some basics:
- This is no back-of-the-napkin set of proposals. Camp and his committee — the primary tax-writing panel in Congress — have been working on this for two years. They've held extensive public hearings and done significant research.
- Though Camp's reform package has zero chance of enactment in an election year, many of its core concepts are likely to reappear on Capitol Hill as early as 2015, when new chairmen at both Ways and Means and the Senate Finance Committee take up fundamental tax reform.
- Even the most die-hard proponents of real estate tax benefits concede that with the right combination of lower federal income tax brackets and higher standard-deduction levels, housing's special carve-outs in the tax code would be less compelling to many homeowners. Why itemize when you can just take the standard deduction and save more? Once this sinks in, the political support for retention of owners' unique tax privileges in the code will begin to crumble.
So what did Camp propose? For the vast majority of individuals and corporations, enticingly lower marginal rates of 10% and 25%, plus a substantially increased personal standard deduction — $22,000 for married joint filers, $11,000 for singles. Individuals with annual incomes above $400,000 and joint filers above $450,000 would pay taxes at a marginal rate of 35%.
In exchange, say bye-bye to the mortgage interest deduction in its current form. The $1-million limit on mortgage amounts that qualify for interest deductions would phase down to $500,000 in four annual steps, with no indexing to inflation. This would effectively diminish its value year after year as inflation takes its bites.
The good news on interest deductions: Anyone with an existing mortgage of $500,000 or higher on the date the tax bill takes effect would be grandfathered for the life of the loan. The bad news: Interest write-offs on home equity borrowings, currently limited to $100,000, would be prohibited unless the money was being used to improve your property.
Another set of changes Camp would make: He'd revise the present $500,000 and $250,000 capital gains exclusions for profits on sales of homes by joint filers and single filers, respectively. Under today's rules, you can claim a tax-free exclusion once you've owned and lived in a home for two years out of the preceding five years and you can do so once every two years.
Under Camp's proposal, you'd need to own your house for five out of the preceding eight years to claim a tax-free exclusion and you could exercise this privilege only once every five years. Capital gains exclusions for home sellers with high incomes — $250,000 a year for singles and $500,000 a year for joint filers — would be phased out altogether over a period of years.
Link to article: