Proposed changes to the Mortgage Interest Deduction

Proposed change to tax deduction could drop home prices by 15 percent

A panel appointed by President Bush has submitted tax reform recommendations that would be devastating to homeowners,the most critical of which is converting the mortgage interest deduction (MID) to a tax credit.

The value of the nation's residential property could decline 15 percent or more if the mortgage interest deduction (MID) is converted to a tax credit, according to preliminary projections by NAR's Economic Research Division. The plan would phase in over five years for existing mortgage holders.

The housing sector accounts for about 15 percent of the nation's Gross Domestic Product. Consumers' nest eggs will also be jeopardized because many homeowners count on the equity in their home to supplement their retirement.

Eliminating the tax deduction for second homes, another proposal under consideration, would impact at least 5 percent of the GDP. Second homes accounted for 36 percent of all home sales last year.

The mortgage interest deduction has been part of U.S. tax policy since the federal tax code was first enacted in 1913.

Other recommendations include:

• reducing the $1 million cap on mortgages to the local FHA loan limit (which can be as little as $170,000 and no more than $312,000 in high cost areas such as Alaska, Hawaii, Guam or the Virgin Islands)
• repealing the deduction for property taxes, as well as other state and local taxes
• raising the amount of gain to be excluded on sale of a principal residence but reducing the frequency in which the exclusion can be taken.

The Tax Reform Act of 1986 demonstrated that when the tax benefits associated with real estate ownership are curtailed, the value of real estate declines. The resulting loss of value in the commercial real estate sector was 30 percent following passage of that legislation.

On October 31, NAR Directors approved funding new research to determine the economic effect of the panel's recommendations, especially their impact on the value of residential and commercial real estate, and assess their impact on homeownership.

The NAR urges that real estate be recognized as a long-term investment, so the tax system should reflect the stream of income and expenses associated with long-term investments. Deductions for the amount of the purchase price and the loss of interest deductions are ill-advised for real estate investments. NAR also urges that the president and Congress preserve the deduction for state and local taxes, including property taxes.

A workable tax system should treat home ownership as investment not consumption; encourage savings and tax-based incentives for home purchases; eliminate penalties for using savings for home purchases; and treat services associated with the purchase of real estate as part of the investment cost of the transaction, and not tax those services.

The President's tax reform panel has sent the proposals to the Treasury Department for review. From there, they go to the President and then to Congress. Modifications can be made at any stage of this process.

These proposals are bad for homeownership, bad for real estate and bad for the American economy. NAR leadership and staff have been and will continue to meet with members of the Treasury department and tax commission and will vehemently oppose them should they be considered by Congress.