Builders vow to save home loan tax break

Author: Sue Kirchhoff and Kathy Chu

Published: October 13, 2005

Home builders vowed Wednesday to fight any attempt to eliminate tax preferences for homeownership. But several economists said a federal commission's plan to trim mortgage interest deductibility was needed to address broad market distortions.

The debate springs from Tuesday's decision by a special panel, appointed by President Bush, to recommend reducing tax breaks for home mortgage interest and employer-provided health care, while increasing deductions for charitable contributions.

The mortgage proposal is drawing the most attention. Homeowners can now deduct interest on mortgages up to $1 million. The panel likely will suggest a threshold of around $300,000 when it makes a final report on broad tax code changes Nov. 1. The mortgage and health care trims are intended to help pay for repeal of the alternative minimum tax, which will affect 20 million taxpayers next year.

"When this report is issued and the debate then begins ... the National Association of Home Builders is going to do its damnedest to protect the preferred treatment of housing in the tax code," says Jerry Howard, NAHB executive vice president.

Howard and Linda Goold, tax counsel for the National Association of Realtors, say overhauling the tax code would be a long slog. But in the short term, Goold worries the panel's proposal will "send a lot of chills" through the market and cause people to hold off on buying or selling a home. If the proposal becomes law, home values might be affected.

"We know that when the tax benefits of real estate are changed, at the higher end of the market, values go down," Goold says.

The effects could be uneven. Nationally, the median home price is $220,000, but is higher in the West, at $322,000, and in the Northeast, at $254,000.

In a recent report, the non-partisan Congressional Budget Office said capping the deduction at $500,000 could increase tax revenue by nearly $50 billion from 2006 to 2015.

Home lending and prices could decline at the top end of the market, though the impact would depend partly on the speed of the change.

The CBO and other economists point out that the money owners invest in their homes brings a tax-free return, unlike most other investments. In addition to the mortgage deduction, owners get a capital gains break on profit of up to $500,000 on the sale of a residence for a married couple filing jointly (or $250,000 for a single owner) that meets certain requirements.

Mark Zandi, chief economist at Economy.com, argues the nation has been putting too much money into housing -- about 35% of net private investment since 1980, according to the CBO -- instead of other economic sectors. Consumers have cashed out trillions of dollars in home equity during the five-year boom market.

"There are strong arguments to be made that we're overinvesting in housing and that households increasingly are too reliant on their homes as a source of cash," Zandi says. "That's in part a result of tax policy."

With more limited tax breaks, consumers might not cash out as much home equity, eventually boosting personal savings from current low levels.

William Gale, senior fellow at the Brookings Institution, says the value of the tax deduction has diminished in past decades as tax and mortgage rates have fallen: "The notion that any diminution in the value of the mortgage (deduction) is a catastrophe for America's homeowners is just completely off base."

AMT taxpayers

Taxpayers who pay the alternative minimum tax:

2005:2010 projection

Number 3.5 million:30.9 million

Percentage of taxpayers 4.1%:30.6%

Source: Urban-Brookings Tax Policy Center