Housing-and-tax reform a complicated issue

What would happen to home values in the event that popular real estate deductions for mortgage interest and local property taxes were cut significantly? It’s an issue you’re likely to hear more about as Congress and the Obama administration wade deeper into “fiscal cliff” and comprehensive tax reform negotiations heading into 2013. More

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Housing-and-tax reform a complicated issue

Posted 12/10/12

What would happen to home values in the event that popular real estate deductions for mortgage interest and local property taxes were cut significantly? It’s an issue you’re likely to hear more about as Congress and the Obama administration wade deeper into “fiscal cliff” and comprehensive tax reform negotiations heading into 2013.

Some of the forecasts are scary: Any significant reductions in these long-established tax benefits would inevitably trigger declines in home values. Under some circumstances, they could be well into the double digits – 15 percent, according to Lawrence Yun, chief economist of the National Association of Realtors. “That’s how much we can expect values to fall as buyers discount the value of the deduction in their purchase offers,” Yun said.

Other projections are more nuanced: Yes, cutting back on real estate write-offs could make homes less attractive financially, but other potential features of a final tax compromise could counteract the loss of deductions, softening the net impact on values. Plus no one on Capitol Hill is talking at the moment about eliminating the mortgage interest or property tax write-offs, just capping them in some way for higher-income individuals.

So what can you believe? Here’s a quick overview of what is inherently a complicated subject. Start with the basics. Both President Barack Obama and some Republicans hinted during pre-Thanksgiving preliminary fiscal discussions that they might be open to raising revenues in part by limiting unnamed deductions and “loopholes” in a tax reform package next year.

When it comes to deductions for taxpayers who itemize, there are hardly any bigger than the mortgage interest write-off ($90-plus billion a year in revenue costs to the Treasury) and local real estate property taxes (roughly $20 billion a year). They are perennially high on the list of reformers who seek to streamline the sprawling federal tax code.

For much of his first term, President Obama advocated putting a cap on deductions by upper-income taxpayers – singles with more than $200,000 in adjusted gross incomes and joint-filing married couples with income in excess of $250,000. Under Obama’s plan, these taxpayers could not take deductions beyond the 28 percent marginal bracket level, even though they might be in the 33 percent or 35 percent brackets. Mortgage interest, real property taxes, charitable and other write-offs would be affected by such a cap.

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