FRONT LINES: News ∙ Trends ∙ Analysis ∙ People

Federal Tax Reform
Fending off disaster
NAR ready to fight assault on critical homeownership deductions.

BY ROBERT FREEDMAN

When the NATIONAL ASSOCIATION OF REALTORS® Federal Taxation Committee met in San Francisco for the REALTORS® Conference & Expo in late October, Chair Steve Hanleigh threw out his planned agenda and issued a call to arms.

An advisory panel appointed by President George W. Bush in January 2005 was only a few days away from issuing long-awaited recommendations on reforms to the federal tax system. Hanleigh knew the NAR tax committee had to focus like a laser beam on what was expected to be a major assault on the storied success of homeownership in the United States.

“There’s really only one thing on our agenda today,” Hanleigh, GRI, told the committee. “Some of the most important building blocks for our housing prosperity are at risk.”

Sure enough, one day after the conference ended, the advisory panel released its report. The panel’s recommendations would

• Replace the $1 million cap on the mortgage interest deduction with the local FHA loan limit (which ranges from $172,000 to $312,000), and change the deduction to a 15 percent credit taken against the amount of household mortgage interest paid
  
• Eliminate the deduction for state and local taxes, including property taxes, and the deduction for mortgage interest on second homes
  
• Increase the amount of gain to be excluded on the sale of a principal residence but reduce the frequency with which the exclusion can be taken
  
• Allow immediate expensing of the deduction for acquisition of commercial and investment property in lieu of depreciation over a term of years
  
• Eliminate deductions for interest and taxes on commercial and investment properties

The proposals would also make some simplifications to the federal Tax Code and create a family tax credit.

Unprecedented upheaval

The recommendations are currently with the U.S. Department of the Treasury, which will report to President Bush on whether to make them the administration’s policy, either as a whole or in part. The administration is expected to make its intentions clear by early February, when the President sends his fiscal year 2007 budget request to Congress.

In the meantime, NAR and a host of other industry and consumer groups are working to build industry and consumer awareness.

“We’re raising the loudest possible alarms over the potential economic impact these ill-considered proposals would have if they ever become official,” said NAR President Thomas M. Stevens at the San Francisco meeting.

In anticipation of the report, NAR’s tax committee passed new policy statements, later approved by the NAR Board of Directors, stating the association’s clear opposition to the panel’s recommendations.

The economic impact of the proposals would be no less than a swift and sweeping drop in home values by at least 15 percent, among other far-reaching and as-yet unseen consequences, say industry leaders.

“You’ll see a double whammy,” David Pressly Jr., president of the National Association of Home Builders, told reporters in a mid-November conference call. “First you’ll see a major tax hike [on your costs to own a home] and then you’ll see a dramatic drop in your home value.”

For a typical family of four earning $100,000 in household income and paying off a $300,000, 30-year fixed-rate mortgage at 6 percent interest, the impact could be significant: more than $2,000 in additional annual federal income taxes, NAHB says. (For an NAR analysis on how households could be affected by the changes, see “A bigger tax burden,” p. 12.)

“When families look at the risk of seeing a 15 percent reduction in their home equity and of paying higher federal income taxes, they’re certainly alarmed,” says Rep. Jerry Weller, R-Ill., a member of the tax-writing House Ways & Means Committee. “And we’re hearing a real sense of that alarm from our constituents.”

Girding for showdown

NAR has moved quickly on Capitol Hill to let lawmakers know of REALTORS ’ concerns over the proposals. “We’re meeting with members on both sides of the aisle to reinforce what many of them already understand: Consumers’ nest egg will be jeopardized if these proposals move forward and the value of their homes drop,” says NAR Chief Lobbyist Jerry Giovaniello. “The proposals send dangerous signals to markets as buyers and sellers start to worry about what might happen. Any kind of instability like this isn’t good.”

Key members of Congress are already taking action. Reps. Weller and Mark Foley, R-Fla., in mid-November circulated a letter among their colleagues on the Ways & Means Committee expressing concern over the proposals. Eight Republican members of the committee—enough to swing the vote on the majority side—have signed on, signaling to the committee leadership that passage of the proposals by the committee will be a challenge if their concerns aren’t addressed.

The members signing the letter are Kevin Brady (Texas), Eric Canter (Va.), Foley, Wally Herger (Calif.), Nancy Johnson (Conn.), Ron Lewis (Ky.), Clay Shaw (Fla.), and Weller.

Should President Bush adopt all or some of the recommendations, a member of Congress must insert the recommendations into a bill. Members of the Ways & Means Committee would be the first to review the legislation.

“We urge the President not to accept these proposals,” says NAR’s Stevens. “They are bad for homeownership, bad for real estate, and bad for the economy. NAR will vehemently oppose them should they be considered by Congress.”

A bigger tax burden

Here’s a simplified look at how three households would fare under the tax reform panel’s proposal to change the mortgage interest deduction to a tax credit and eliminate the deduction for state and local taxes, including property taxes. The examples are for illustration purposes only and do not reflect variables such as personal exemptions and other allowable credits. In addition, the tax rates applicable today might not be the rates that would apply under any legislative change; the examples reflect only the impact of changing the mortgage interest deduction and repealing the property tax deduction.