Mortgage-interest idea alarms housing industry

By Alan J. Heavens, Philadelphia Inquirer<br />11-13-05<br /><br />A proposal by President Bush’s tax-reform panel to convert the mortgage-interest deduction to a 15 percent tax credit is not sitting well with the housing industry and its allies.<br />Loss of the deduction could result in home prices’ decreasing by 15 percent, especially in high-cost areas such as California, said Al Mansell, president of the National Association of Realtors.<br />According to 2003 data from the Internal Revenue Service, 52 percent of families claiming the deduction earn between $60,000 and $200,000 a year.<br /><br />Homeowners now are permitted to deduct interest payments on mortgage debt of up to $1.1 million, including $100,000 for home-equity loans. That deduction, under the tax panel’s proposal, would be replaced by a credit equal to 15 percent of the interest paid on mortgages. The average regional price of housing in the Philadelphia area ranges from $227,000 to $412,000.<br /><br />Equally disturbing, said Jerry Howard, executive vice president of the National Association of Home Builders, would be the chill the changes would send through the housing market, “which has been leading the economic expansion for the past three years.”<br />Among the other proposals are:<br /><br />Collapsing six tax brackets into four, and eliminating the alternative minimum tax. The current six brackets, ranging from 10 percent to 35 percent, would be replaced by four tax brackets of 15 percent, 25 percent, 30 percent, and 33 percent.<br />Reducing the $1 million cap on mortgages to the local FHA limit, $237,500.<br />Eliminating the deduction for second homes, which now account for 35 percent of annual home sales nationwide.<br /><br />Repealing the deduction for property taxes, as well as state and local taxes.<br />Raising the amount of gain to be excluded on the sale of a principal residence, but reducing the frequency with which the exclusion can be taken. Now, for example, if you have a gain from the sale or exchange of your principal home, you may be able to exclude up to $250,000 of the gain ($500,000 for certain married taxpayers filing joint returns); the exclusion may be allowed each time you sell, but generally no more frequently than once every two years.<br />If the proposed changes become law, the middle class would take the biggest hits, industry observers said.<br /><br />”The combined effect of the replacement of the current mortgage-interest deduction by the more modest credit, combined with a proposed cap on the amounts eligible for the credit, would hurt far more homeowners than the credit would help,” said Bruce N. Hahn, president of the American Homeowners Grassroots Alliance, which often takes views contrary to the Realtors. “The amount of a mortgage eligible for the credit is limited to the average regional price of housing. That means while half of the homeowners will get to take full benefit of the credit, the other half would not be able to take full advantage… .”<br /><br />This is the second time in a decade that the mortgage-interest deduction has been in jeopardy. U.S. Rep. Dick Armey’s flat-tax proposal in 1995 would have eliminated it.<br />”It is a bad idea,” said U.S. Rep. Dennis Cardoza, a California Democrat who is a member of the moderate, bipartisan Blue Dog Coalition in Congress. “In the last five years, there has been a 30 percent increase in government spending. We need to have people in government who know how to balance the budget by cutting spending.”<br /><br />The Realtors association’s chief economist, David Lereah, called the proposal “irresponsible” and the timing “terrible,” since the real estate market, while far from taking a nosedive, is slowing noticeably. “When you combine the long-term effects of the hurricanes with rising interest rates, such a plan would do severe damage across the board,” he said.<br /><br /><strong><a href=””>Fred Glick, President of USLoans Mortgage of Philadelphia</a></strong>, said the changes would have “an ugly impact initially,” until people completely grasped their meaning. “People will not take out home-equity loans, believing that they aren’t deductible, and will use high-interest credit cards instead,” Glick said. “A lot of renters will remain renters. It could even shut down the second-home market.”Eliminating the mortgage deduction also would take away a major argument in favor of home ownership.<br /><br />”First-time home buyers count on the deduction, because they know [it] can mitigate the effects of a large payment,” said Gary G. Schaal, vice president of sales and marketing for Orleans Homebuilders in Bensalem. “The loss will likely have a psychological effect.”

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