Tax reform must protect homeownership
by William E. Brown
The 115th Congress is gearing up for an intense legislative session, and tax reform is set to play a starring role.
America’s tax system deserves an overhaul, with an eye toward ensuring individual tax rates are as low as possible while still providing for balanced fiscal policy.
Congressional leaders on both sides of the aisle have done tremendous work to get us there, and we’re hopeful this conversation continues.
For the roughly 75 million home-owning families across the country, the stakes couldn’t be higher.
Important tax incentives for homeownership and real estate investment like the mortgage interest deduction, state and local property tax deduction, and 1031 like-kind exchange are critical. They’re key to protecting home values, supporting investment and helping new buyers enter the market.
“American homeowners already pay between 80 and 90 percent of all federal income taxes. Without the MID, that figure could rise to 95 percent.”
First, American homeowners already pay between 80 and 90 percent of all federal income taxes. Without the MID, that figure could rise to 95 percent. It’s particularly troubling considering the fact that more than half of families who claim the MID earn less than $100,000 per year.
The state and local property tax deduction is essential to homeowners as well. Current homeowners know that paying property taxes is a part of owning a home, but they also know those payments to state and local governments can be deducted from their federal income tax.
Without that deduction, homeowners would get taxed on the income used to pay their property taxes. This is a form of “double taxation” that hits home for lower and middle-income households.
The value of these tax incentives is already baked into home prices, meaning there’s a very real likelihood that eliminating those benefits could cause home values to plummet.
Many metro areas have experienced a significant rise in equity since the Great Recession, but others struggle to regain their pre-housing crash value. A steep drop in home prices, even temporarily, could put millions of homeowners underwater again on their mortgages. That pulls the rug out from under homeowners who built budgets or long-term retirement plans around the current rules.
But outright elimination of these incentives isn’t the only threat to homeownership. Proposals to double the standard deduction, as the House of Representatives has put forward, would effectively negate the importance of these tax provisions for all but the most affluent taxpayers.
That’s a huge step in the wrong direction.
For over a century, America has incentivized homeownership through the tax code, and for good reason. Purchasing a home is a way for families to put down roots and invest in their communities. It’s also an important part of economic growth, with housing accounting for 16 percent — or $2.9 trillion — of the Gross Domestic Product.
Homeownership is a key driver of wealth accumulation for millions of families, with the median net worth for homeowners standing at $200,000 versus just over $5,000 for renters.
For most homeowners, their home is their single largest asset. Homeownership is also a way to protect families against inflation and rising costs for housing, because while rents may rise, a fixed-rate mortgage remains the same month after month.
“Most homebuyers put up a significant down payment just to get in the door, with the first few years of mortgage payments comprised primarily of interest on the loan.”
Like any investment, purchasing a home comes with some level of risk. Most homebuyers put up a significant down payment just to get in the door, with the first few years of mortgage payments comprised primarily of interest on the loan.
The MID and other tax incentives help alleviate that burden, making homeownership a viable option for those of modest means.
That’s how younger homeowners are able to grow their net wealth protect their income, “roll up” to a larger home when they have a family or grow a nest egg for retirement.
We know there’s a lot on the line for real estate investors as well. The 1031 exchange is a critical tax provision that allows investors to trade a business or investment asset for a similar property, deferring any tax until the investment is “cashed out.”
The result is that rather than simply selling a property and taking gains, investors have an incentive to reinvest those funds back into the business and the neighborhood. That’s good for the recipient as well as the community, but the tax incentive is on the chopping block as Congress considers reform.
Those incentives must be preserved.
Of course, tax reform ought to be proactive. Congress should look to reinstate tax relief for mortgage debt cancellation, so homeowners going through a short sale aren’t taxed on the “phantom income” their forgiven debt represents. And, as home prices rise, Congress should also index the capital gains exclusion for home sales to account for inflation and preserve the benefit for future homeowners.
The reality is that whether you rent, buy or invest, everyone is counting on a tax proposal that moves the economy forward. Protecting tax incentives for homeownership and real estate investment is key to that success.
Originally Published in The Hill.
Brown is president of the National Association of Realtors.