Homeownership is one of the best, and biggest, tax breaks out there. You can deduct mortgage interest, property taxes, even make changes to your home that could help reduce any possible future tax bill.
To some, these are way too many benefits that go to a small, relatively wealthy segment of the U.S. population. To others, homeownership tax breaks are sacrosanct and eliminating any of them would kill America's housing industry and damage the overall economy.
After a Ways and Means committee hearing April 25, it appears that lawmakers are pretty happy with the current home-related tax laws.
And that doesn't bode well for what some, on and off Capitol Hill, hoped would be wide tax reform.
Tax policy, not loopholes
"Homeownership is an integral part of the American dream, and the tax code has long provided a variety of incentives to make it easier for families to buy and own a home," said Ways and Means Chairman Dave Camp, R-Mich., in his statement opening the hearing. "We also know that the real estate industry plays a large role in our economy. So, this is an area that needs careful, thoughtful review."
"Careful, thoughtful review" is legislative-speak for "not so fast with killing that tax break."
The committee's ranking Democrat was more explicit.
Rep. Sander M. Levin, D-Mich., said current homeownership tax policies should be considered policy, not loopholes.
"Let's be clear. There are many egregious loopholes in the tax code. But the main provisions incentivizing home ownership are policies, not loopholes," Levin said. "The failure to differentiate which is which, between policies and real loopholes, has led to facile proposals."
Levin cited a Joint Committee on Taxation report that found 70 percent of the benefit of the mortgage interest deduction goes to households earning less than $200,000 a year. Less than a third of the benefit, 30 percent, goes to those who make more than that, Levin said.
The Michigan Democrat suggested that a better tax reform target would be the lower tax rate for capital gains, which he said almost exclusively benefits the very wealthy.
High tax cost of home tax breaks
Among witnesses at the hearing, only Eric Toder, co-director of the Urban-Brookings Tax Policy Center, questioned homeowner tax breaks.
Toder pointed to Joint Tax Committee data showing that the mortgage interest deduction will reduce federal receipts by about $70 billion in fiscal year 2013 and by about $380 billion between fiscal years 2013 and 2017. Real estate deductions by homeowners come to $153 billion between 2013 and 2017.
And the ability to exclude up to $250,000 by single home sellers (double that for married joint filers) from capital gains on the sale of a principal residence will cost the U.S. Treasury $130 billion between 2013 and 2017.
"It would be possible," Toder said, "to provide a larger incentive for home ownership at a lower fiscal cost by converting the deduction to some form of uniform credit and placing additional limits on the amount of debt eligible for the subsidy and the use of the subsidy for home equity loans and second homes. Bipartisan tax reform and debt reduction commissions have endorsed this type of approach."
Too popular to eliminate?
But will Congress endorse a home tax credit instead of the current residential tax breaks?
The mortgage interest deduction is one of the most popular tax breaks, said Toder, and politicians have in the past viewed it as untouchable.
It's the only deduction that President Ronald Reagan promised to protect in 1984 when the framework for the massive 1986 tax reform bill was being created.
And with the housing market picking up -- home prices climbed 9.3 percent in the 12 months leading up to February, according to the latest data from the S&P/Case-Shiller home price indexes -- there isn't likely to be much congressional interest in doing anything right now that might slow this momentum.
So if, as many have recommended, the 1986 tax law is used as the basis for tax reform today, then look for the mortgage interest deduction to come through the process unscathed.
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Veteran contributing editor Kay Bell is the author of the book "The Truth About Paying Fewer Taxes" and a co-author of the e-book "Future Millionaires' Guidebook."