The nation’s Realtors, mortgage bankers and homebuilders are lining up against a proposal to limit the tax deductions that homeowners can take on interest paid on home mortgages, arguing that such a move would be a crushing blow to the housing industry.
A tax advisory panel formed by the Bush administration earlier this year to pinpoint problems in the nation’s tax code has recommended replacing the mortgage interest deduction with a 15 percent tax credit that would be limited to interest paid on a primary residence. The panel also wants to eliminate deductions that homeowners can take for interest paid on second-home mortgages and home-equity loans and take away property tax deductions.
Critics say removing such a popular incentive as the mortgage interest deduction would make real estate investing much less attractive and lead to a drop in housing demand. As a result, home values would plummet as much as 15 percent, the National Association of Realtors’ Economic Research Division has predicted.
“All homeowners, irrespective of tax filing status, will see their home value decline by 10 percent to 15 percent,” NAR Economist Lawrence Yun told Banker & Tradesman last week. “The ‘dividend’ stream in terms of the current mortgage interest deduction and property tax deductions will get chopped off immediately and the aggregate loss in value, in present value terms, will be such that the housing sector will lose out 10 percent to 15 percent.”
Locally, real estate and mortgage industry officials worry about how such a tax reform proposal would affect housing, which has helped boost the state’s, and nation’s, sluggish economy.
“The mortgage interest deduction has been a major reason why real estate investing has been so popular with a lot people,” said David S. Drinkwater, a Scituate real estate broker who serves as New England regional vice president for NAR. “It’s enabled Middle America to buy homes across the country and something that’s going to change that or take that deduction away could have far-reaching ramifications in terms of homeownership and housing opportunities across the country.”
Homeowners are currently allowed to deduct interest paid on mortgage loans of up to $1.1 million, whether it’s for a primary residence or second home, from state and federal income taxes.
Under the proposal, the mortgage tax credit would be based on the average cost of housing within a taxpayer’s area, with a cap of $227,127 to $411,704. That means that for homeowners with mortgage loans of up to $411,704, all of the interest would qualify for the tax credit.
But opponents maintain that limiting the tax credit would be troublesome in high-cost housing areas like Greater Boston, where mortgage debt can exceed the $411,704 cap.
‘A Major Incentive’
If the changes are implemented, it will be especially hard for property owners and homebuyers in the Greater Boston area and eastern Massachusetts, where home prices are particularly steep, said Charlie Nilsen, New England regional manager for JP Morgan Chase Home Finance and a board member of the Massachusetts Mortgage Bankers Association.
“The proposal very unfairly treats more expensive markets and it will disproportionately affect many parts of New England,” Nilsen said.
Drinkwater, who is a certified public accountant, agrees. “When you’ve got many people in Greater Boston with homes that are worth in excess of $1 million, it starts to take away much of the benefit for investing in properties in that price category,” he said.
The panel’s recommendation to completely scrap the mortgage tax write-off on second homes also would have a drastic effect in areas of New England that have an active vacation home market, including Cape Cod and the Berkshires, according to Nilsen and Drinkwater.
And Drinkwater said the proposal is likely to hurt baby boomers, many of whom have invested in real estate and are relying on the built-up equity in their homes to fund their retirements, pay for their children’s college education or help them care for elderly parents.
“If the tax deduction benefits are removed from homeownership, it’s going to have an impact on how people view the purchase of real estate and is likely to have a significant negative impact on property values,” said Drinkwater, president of Grand Gables Realty Group in Scituate.
Added Nilsen, “It will reduce the rate of homeownership because a major incentive of owning a home goes away.”
The panel contends that more homeowners would benefit from a tax credit because they wouldn’t have to itemize deductions to take advantage of it, which would ultimately make owning a home more affordable.
In fact, even though the real estate industry is opposed to the proposal, some local Realtors are unclear about its effects and believe that homeowners could benefit from tax credits.
“My understanding is that if it were to pass, [there] would be similar tax benefits from the credits, as opposed to the deductions. So there would still be a tax benefit,” said Phyllis Sagan, owner of the Sagan Agency in Swampscott and a member of the Realty Guild, an association of independently owned real estate offices.
Pat Tierney, one of the owners of Stanton & Tierney Real Estate in Boston’s Hyde Park neighborhood and also a member of the Realty Guild, said depending on their individual tax situation, some homeowners might benefit from a tax credit.
But Yun, the NAR economist, said a decline in home values “will be far more significant than any person-by-person cases of gains or losses” under the proposal.
“There’s currently a tax benefit that’s flowing to homeowners. If this is taken away, the value of the underlying asset, the home, will fall,” said Yun.
And Yun said states like Massachusetts will be hit even harder if the changes are implemented because of “larger-than-average mortgage interest deductions and property tax deductions” that taxpayers currently take.
By some estimates, the mortgage interest deduction will cost the federal government about $76 billion in tax revenues next year. Eliminating the deduction would help cover some of costs of the war in Iraq and expenses associated with Hurricane Katrina.
Still, some observers believe that the proposal will be a difficult sell in Congress. Given that the national homeownership rate is about 70 percent, industry leaders say it would be politically risky for legislators to anger such a large constituency.
“It’s the biggest tax hike for homeowners ever considered,” said Jerry Howard, executive vice president and chief executive officer of the National Association of Home Builders, in a prepared statement. “Replacing the mortgage interest deduction would punish millions of homeowners, particularly those living in California and other high-cost markets. Equally disturbing [is that] the tax reform proposal would reduce home values and send a chill through the housing market, which has been leading the economic expansion for the past three years.”
