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PROPOSED TAX LAW CHANGES
Federal Plan to Convert Mortgage-Interest Deduction Stuns Housing Industry RISMEDIA, Nov. 15 - (KRT) - The proposal by President Bush´s tax-reform panel to convert the mortgage-interest deduction to a 15% tax credit is not sitting well with the housing industry and its allies. Loss of the deduction could result in home prices´ decreasing by 15%, especially in high-cost areas such as California, said Al Mansell, president of the National Association of Realtors. According to 2003 data from the Internal Revenue Service, 52% of families claiming the deduction earn between $60,000 and $200,000 a year. 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% of the interest paid on mortgages. 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." Among the other proposals are: • Collapsing six tax brackets into four, and eliminating the alternative minimum tax. The current six brackets, ranging from 10% to 35%, would be replaced by four tax brackets of 15%, 25%, 30%, and 33%. • Reducing the $1 million cap on mortgages to the local FHA limit, $237,500. • Eliminating the deduction for second homes, which now account for 35% of annual home sales nationwide. • Repealing the deduction for property taxes, as well as state and local taxes. 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. If the proposed changes become law, the middle class would take the biggest hits, industry observers said. "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. ... " 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. "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% increase in government spending. We need to have people in government who know how to balance the budget by cutting spending." 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. Fred Glick, president of USLoans Mortgage of Philadelphia, 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. "First-time home buyers count on the deduction, because they know 1/8it3/8 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." Copyright © 2005, The Philadelphia Inquirer Distributed by Knight Ridder/Tribune Business News. Article from Asset Preservation, Inc. E-news. November 2005 Please click on the topic below to view the html version of the November 2005 1031 Exchange E-Newz from Asset Preservation, Inc: Proposed Tax Law Changes PROPOSED TAX LAW CHANGES:
The President´s Advisory Panel on Federal Tax Reform recently released a 270-page report that recommended two ways to modify the U.S. Federal tax code. (This Federal Tax Reform report can be accessed at www.taxreformpanel.gov.) One plan is known as the "Simplified Income Tax Plan" and the other is the "Growth and Investment Tax Plan." Both of these proposals seek to make the tax code fair and simple. It is important to note that at this time, these are merely the panel´s recommendations. There is a complicated and long legislative process that is involved anytime changes are made to the tax code. MORTGAGE INTEREST DEDUCTION CHANGES The mortgage interest deduction, which is currently capped at $1.1 million, would be turned into a 15% credit and apply only to principal residences. In addition, the maximum debt eligible for the credit would be limited to 125% of the median sales price for the county, based upon Federal Housing Administration data (Current limits range between $227,147 and $411,704.) It is estimated that between 85% - 90% of all mortgages originated in 2004 fall below these levels. REAL ESTATE TAX CHANGES The deduction for state and local taxes, including real estate taxes, would be repealed. PRIMARY RESIDENCE SALE CHANGES The tax exclusion for capital gain on the sale of a primary residence would remain. Potential Impact: Homeowners will generally need to stay in their principal residences for one more year to qualify for the $500,000, married filing jointly, or $250,000, single, tax exclusion available under IRC Section 121. This additional holding period requirement may reduce the volume of property sales and negatively impact those services associated with the sale and transfer of real estate. Information on this web page should not be regarded as advice regarding specific tax/financial issues and is not intended to replace qualified legal and/or professional advisors. Please review your specific financial or tax situation with your legal, financial and/or tax advisors. Some articles presented are property of the correspondant publication, and are a trasncript only offered as a service for informational purposes related with real estate. Please subscribe to those publications for immediate news. |