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October 13, 2005

Pres Panel May Make Ownership Less Sweet

Amid yesterday's chaotic server switch, we neglected to raise one burning issue for discussion: the proposed changes to the tax code that may include a significant roll-back of the deductibility of mortgage interest as well as a reduction in the amount of tax-free capital gains an individual or couple may take. It seems like strange timing to spring this on the market now, with talk of the impending bursting of the bubble splashed across every front page. Depending on the scale, meaningful cutbacks on either measure would have to hurt the market, we'd think. What do people think about a) the likelihood of significant changes and b) the potential impact of such changes?
Mortgage Deduction Changes on Table [CNN Money]

Comments

These reforms would be totally fair and a tiny step towards a more equitable tax code (thus there seems little likelihood the Bush admin will enact them.) There's just no good reason someone should be able to take a half million in tax free profits--and no way on earth that benefits anyone but those of us with a ton of money.

I hate to get partisan this early in the morning, but you can always tell a democrat: if you propose something that will hurt them and help the less fortunate, we'll always go for it.

Posted by: Ben Arthur at October 13, 2005 8:58 AM

I agree with Ben. I also think that in part, those tax reforms are meant to curb the obsession with real estate in the this country (albeit a tad late).

Posted by: Anonymous at October 13, 2005 9:07 AM

I agree, too.

If these reforms passed, they'd be *really bad* for me, because we have our budget worked out counting on those tax breaks--but I still have to admit that the breaks seem tremendously unfair in the first place.

When we bought our house, I couldn't believe it-- Why should renters foot the bill for owners, who presumably (though not necessarily in my case) make more money?

Posted by: Anonymous at October 13, 2005 9:12 AM

"There's just no good reason someone should be able to take a half million in tax free profits--and no way on earth that benefits anyone but those of us with a ton of money."

Seriously, no good reason?!? It's called capitalism, and the country is the US of A, not France, or Denmark, or Sweden.

Not every homeowner is able to max out the $500K deduction everytime they sell their house. The capital gain exemption benefits anyone and everyone who OWNS homes, and they can make $100 in profit or $500,000. Home ownership is the American dream, and IT HAS NEVER BEEN ABOUT "those of us with a ton of money".

I hate to see this early in the morning discussions about who should make money and how they should do it. Now, off to make my own money.

Posted by: jmc at October 13, 2005 9:57 AM

The problem with the idea of eliminating the deductability of mortgage interest is that the whole economy is based upon housing. Consumer spending on home improvements ( Home Depot/Lowes), major purchases (appliances, renovations), [the only] consumer savings (equity contribution on mortgage payments), Local RE taxes (based on value), the list of economic dependencies in promoting home ownership is HUGE and if the Govt messes with this (even if it is 'fair') could cause major economic destruption.

Posted by: David at October 13, 2005 9:59 AM

jmc, You're way oversimplifying the issue. If it's anti-capitalistic to tax home-sale profits, then it's anti-capitalistic to tax anything. We might as well disband the government. The fairness issue has to do with a tax system that privileges one form of making money (selling a home) over others (selling stocks, running a business, working a job, etc.)

Actually it would make more sense to argue that the home-sale deduction is what's anti-capitalistic. It exempts a type of capital gain that is not essentially capitalistic (that is, most people selling primary homes did not buy as "capitalists," mainly for investment purposes, but rather as consumers, mainly for shelter). And this exemption is paid for by taxing other kinds of capital gain and revenue.

Getting rid of exemption may be right or wrong, but anticapitalism has nothing to do with it.

Posted by: linusvanpelt at October 13, 2005 10:08 AM

At least the recommendations include current owners being grandfathered in under current tax laws. Still, when you sell to a buyer who can't take a tax break combined with ever increasing interest rates it doesn't bode well for home prices. Good thing I bought a month ago, although at least its a home I'm looking to die in, because I may have no choice.

Posted by: Anonymous at October 13, 2005 10:20 AM

pardon the first time buyer- but this sounds good for middle-class owners, no? help 'splain to me... thanks in advance.

Posted by: Anonymous at October 13, 2005 10:24 AM

The change in tax code to this every 2 year tax-free sale of primary residence at $250,000 has probably added some fuel to the escalation in property prices. More so in higher priced markets such as here in NY. How much it has added is difficult to determine.
It is of course another code in the tax law skewed toward to wealthier population.
The mortgage deduction, although used by a larger group, also benefits the affluent more.
But I think it is so sacrosanct thatit is unlikely will change in near future. So don't worry too much folks. I don't think Bush is likely to try alienating more people than he already has done already.

Posted by: Anonymous at October 13, 2005 10:24 AM

As someone looking to buy, while the tax break has often been touted to me as a great reason to buy, I just don't see it as THE reason to buy when having my own home to raise a family in is really what I'm looking for. While it would be a nice thing to have, if prices come down and rates rise, if someone has saved a nice downpayment, maybe the lack of a tax break won't make that much of a difference. I also think a lot of people used it as an excuse to purchase more than they could really afford (as in, sure it's a high monthly payment, but after the tax break...)

Posted by: Anonymous at October 13, 2005 10:27 AM

Look at who benefits the most from the mortgage deduction. Bush is not going to get any more votes from the blue states anyway, so the political price is low for him. Since they are contemplating eliminating the AMT, they have to look somewhere for money. Unless you prefer to pay AMT, one way or another you are going to pay...Death and Taxes...

Posted by: anonymous at October 13, 2005 10:34 AM

While I don't claim to be an economist, I have read several articles over the years that stated the position that is alluded to above-that the capital gains exemption and the interest deduction cause home prices to be significantly higher than they would otherwise be. If they were eliminated or significantly reduced (which I think is probably not politically feasible at this point), I think that prices would reflect that and the net long term effect would be that on an after tax basis, people would be paying a similar amount for real estate as they do now.

Posted by: Sammy at October 13, 2005 11:43 AM

To anonymous at 10:27, I think it's absolutely valid to factor in to your monthly payments the effect of the tax deduction. On our three family in CH, where we live in half the building, the deduction results in about $1800 a month in gain for me and my partner together. Granted, I benefit from a high tax bracket and the reason the deduction is so high is b/c our mortgage payments are so high (and, also, we can each take a deduction as an individual). Nevertheless this number factors in AMT and, together with solid rental income (taxes on which are offset almost fully by depreciation), is the reason we bought our three family. We, too, of course love owning a home, but the tax break certainly makes it more affordable. I think it would have a very palpable effect on prices should this deduction be rolled back for new purchases.

Posted by: Anonymous at October 13, 2005 12:05 PM

Anon at 12:05, I see your point, and I had certainly considered the deduction something of interest when I was looking for a house (temporarily taking a break from that now) but in reviewing other people's comments, I think that (in the oversimplified easy world we often live in in comments) if the tax break didn't exist, housing prices would be lower (as you said) and then, it wouldn't make much of a difference. You yourself said it's beneficial because your mortgage payments are so high - if they weren't because your house has cost less, it would probably be a wash. So when I do buy a place, if there is no more tax break, I would think prices would come down, my mortgage wouldn't be as high as it would be now and in the end, my payments without the break would be similar to what they would be with it had I paid more money for a house.

Basically, I don't want to use the tax break as a reason to buy a place I can't really afford.

Posted by: Anonymous at October 13, 2005 12:45 PM

Sammy no argument
BUT
the time till that was realized would be truly chaotic

Posted by: David at October 13, 2005 12:46 PM

I think it seems a bit antithetical to Bush's "ownership society" if his administration proposes to scale back or eliminate what is a real incentive to own your primary residence. This is not about capital gains taxes on investment property or stock sales, rather on your primary residence. Everyone who owns their home is entitled to the deduction, whether its a $70K house in Hometown, USA or a $1.5 million brownstone in Brooklyn. If you are a high income earner, then your deduction is greater because it is based on your marginal tax rate. Why is that unfair? If you make a higher salary, you pay a higher tax rate. Shouldn't you be able to take an equivalent deduction for your interest on your mortgage just like someone who earns less than you? It is proportional.

Also, the $250,000 limit per person on tax free gains is no automatically realized, you actually have to have a piece of property that appreciates that much.

I'd be surprised if this get changed drastically, but if it does, surely their will have to be a grandfather provision so that the "rules of the game" are not changed mid-stream. Overall it could very likely affect prices of homes (drive them lower) though not in the long term. So again it is more of a short term remedy to a tax revenue issue. How about repeal the Bush tax cuts, that would make more sense.

Posted by: Anonymous at October 13, 2005 2:44 PM

Sorry about the grammatical errors in the above post, typed it quickly...

Posted by: Anonymous at October 13, 2005 2:46 PM

If I recall correctly, when the law was changed in 1997 (previously you could avoid primary home sale profits only if you re-invested within a certain amount of time), there was no grandfathering. Now, if the tax laws are getting less generous, then maybe that would be a different thing.

But I think the main point to remember is that this is the Bush administration--they will not be raising taxes on the wealthy anytime soon. Hell, they want to get rid of capitol gains and inheritance taxes entirely. Why would they turn around and add new ones? Disgusting, but true.

As Tony Kushner recently pointed out, what we saw in New Orleans is the Republican Dream realized: no safety net, no public services, and everybody carrying guns.

It really is amazing to think that, given our druthers, the vast majority of us Blue Staters would really prefer raising taxes, against our own (short-term) best interest. God bless the Democrats.

Posted by: Ben Arthur at October 13, 2005 4:49 PM

To anon at 4:49: I think the "wealthy" george bush is not worrying about are those who own their home outright (i.e. don't need the tax break and don't need the mortgage for that matter). I think sometimes the psychological million dollar mortgage make some believe those with it are, "wealthy" when really in nyc at least you're just middle to upper class and as you point out are most likely democrats.

Posted by: Anonymous at October 13, 2005 6:17 PM

IMHO, taxing the gain on a house-especially a primary residence-is unfair, because that's really no gain. It's just inflation. People are often fooled by this and think that that they made money.

But, allowing a tax deduction for mortgage interest is just silly. It certainly benefits owners of more expensive homes. But, it also creates a perverse incentive to take on a lot of debt, which may have helped push up this bubble.

On a separate note, I think the notion that Democrats are selfless pursuers of policies that "hurt themselves but help the less fortunate" is just silly and out of context here. If anything, Democratic politics are infected with heavy pro-union and pro-welfare types who certainly are less then selfless in the political debate.

Posted by: JoshK at October 13, 2005 9:20 PM

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October 13, 2005

Pres Panel May Make Ownership Less Sweet

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