New Yorkers shrug off possible changes in mortgage deduction

Nov.November 21, 2007 04:06 PM

So far, few New York real estate industry professionals seem to be concerned about recommendations from the president’s tax advisory council early last month that would greatly reduce the mortgage interest tax benefit that shapes finances of many homeowners.

The President’s Panel of Federal Tax Reform’s proposals would change the home-mortgage-interest deduction into a credit equal to 15 percent of mortgage interest paid. The $1 million limit on mortgages eligible for the existing deduction would be reduced to the average regional housing price, ranging from $227,000 to $412,000. While it’s likely this provision won’t be put in place, it’s got critics up in arms, even in New York, where high housing prices would have a disproportionately greater effect.

In Manhattan, where the average selling price of a home has topped $1 million, the proposal could take a bite out of budgets, but for people who can afford homes that cost that much, it probably wouldn’t make much of a difference, brokers say. That doesn’t mean people like the idea. “It would destroy the foundation of what people build their financial portfolios upon,” said Fillmore Real Estate president and CEO John Reinhardt. “There’s already a big movement to make sure nothing like that happens.”

Industry trade associations, such as the National Association of Realtors and the Mortgage Bankers Association, wasted no time expressing strong opposition to the proposals. Many expect the combined strength of the real estate and mortgage lobbies to squash any such plan.

Some brokers and financial analysts say the proposals will likely serve as a starting point from which to devise a plan for tax changes with less dramatic consequences.

But if the proposals went into effect, it would lessen affordability for homeowners and potential home buyers in markets such as New York, San Francisco and South Florida, where home prices have soared well above the national median home price of about $212,000.

While some New York real estate industry trackers contend that the deduction doesn’t matter to people who are purchasing expensive homes, Barry Leibowicz, a tax attorney in Great Neck, Long Island, and an associate professor in the accounting department of Queens College, says the expected deduction factors into most people’s decision to buy a home. “The higher your tax bracket, the greater your benefit from the tax deduction,” Leibowicz said.

Such a change could have negative ramifications in rural markets where many high earners look to purchase vacation homes. “The real effect,” Leibowicz said, “would be on high-earning middle class people such as doctors, architects and small business people.”

Housing subsidies cast powerful shadow

By Ken Harney

President Bush and the Treasury Department are expected to study the Panel of Federal Tax Reform’s recommendations and then include at least some of them in a budget proposal to Congress early in 2006.

But let’s get real here: Nobody seriously believes that the president or Congress all elected politicians would do anything to reduce tax benefits for their largest and most potent constituency, right?

That is all certainly the conventional political wisdom, and may indeed prove correct.

But the panel’s focus on cutting housing benefits casts fresh light on the sheer size, and asymmetrical distribution, of those subsidies.

The panel members went after housing because housing tax expenditures present such a big target, especially in an era of double-digit appreciation, McMansions and monster mortgages.

Forced to raise revenues to replace the $1.2 trillion 10-year cost of killing the alternative minimum tax, high-cost housing became an obvious place to look.
Consider these numbers if you want to understand where the reformers Republicans and Democrats alike are coming from:

The mortgage interest deduction will cost the Treasury $72.6 billion this year alone, according to congressional estimates.

The $250,000 and $500,000 tax-free exclusions of home sale profits for single sellers and joint filers will cost $23 billion this year.

Property tax write-offs cost $20 billion, and tax subsidies for local and state housing bond programs add another $1 billion.

Who receives these tax breaks? When a congressional committee examined the distribution of homeowner benefits for 2004, it found that people earning $200,000 and more a year just one-half of 1 percent of all homeowners filing for deductions pocketed 22 percent of the $70.2 billion in write-offs last year.

Homeowners with incomes between $50,000 and $75,000 received just 16.1 percent of the $70 billion total. Owners with incomes of $30,000 to $40,000 got just 3.1 percent of the total tax-savings pie.

Property tax write-offs showed a similar distribution. High-income households were 3.8 percent of all owners claiming property tax deductions in 2004, but received 15 percent of the total.

In replacing the mortgage interest deduction with a 15 percent credit, the reformers can argue that far more homeowners the vast numbers who do not itemize on federal tax filings will be able to share the tax subsidy goody bag. By lowering the mortgage ceiling to around $300,000, the subsidies would not so heavily favor wealthy owners in high-cost states. That, in turn, could be supportive of homeownership nationwide for middle-income citizens who either rent or don’t itemize on their taxes. Who knows the homeownership rate might even go up.

That’s the idea anyway. Can it become law? Not in an election year for sure. Could some of it find its way into law someday, as the country grapples with budget deficits, war expenses, and disaster relief reconstruction? That’s where the odds start looking slightly better.

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