Temporary tax write-off could remain

07/26/2008 12:00 AM

07/26/2008 2:29 PM

The giant federal housing and foreclosure relief legislation now heading for enactment contains a little-noticed – but potentially far-reaching – change in real estate tax policy.

It would permit millions of homeowners who do not itemize on their federal tax filings to claim a deduction for at least a portion of their local and state property taxes. Though the House version of the bill set the maximum write-off at $350 a year for single taxpayers and $700 for married joint filers, the Senate's more generous $500 and $1,000 deductions were expected to prevail in the final compromise version.

Originally intended as a one-year economic relief measure for Americans who do not itemize, tax experts say it's highly likely that the new write-off will turn into a permanent feature in the tax code.

Currently it would apply only to tax returns filed on 2008 incomes and cost the federal treasury anywhere from an estimated $1.2 billion to $1.5 billion for the year. The concept originally surfaced last February in the Senate's version of the national economic stimulus package but was left out of the final deal with the House.

According to an analysis of 2005 IRS data by the nonprofit Tax Foundation, only 35.6 percent of all taxpayers – tenants as well as homeowners – itemize on their returns. In some states, the percentage is less than 20 percent, such as West Virginia, where just 18 percent of taxpayers itemized in 2005. Only in Maryland, a relatively high-income state, did more than 50 percent of taxpayers itemize.

Among homeowners nationwide, an estimated one-half itemize, but one-third of all homeowners have no mortgage debt against their property and therefore do not claim mortgage interest as a deduction.

The new legislation would effectively add another tax preference for people who own houses while offering nothing to those who rent. The idea, say supporters, is to provide greater tax fairness for a huge category of owners – often seniors and lower – to moderate-income households who opt for the standard deduction but also pay local and state property taxes.

Critics of the plan say it's another example of the government's ongoing, inequitable approach to housing policy – overemphasizing the financial benefits for homeownership versus renting. Some critics argue that these heavy tax subsidies for ownership helped stimulate buyer mania during the boom years, along with zero-down and “stated-income” financing that put thousands of people into real estate they could never afford.

“We think (the new deduction) is terrible policy,” said James Arbury, senior vice president for government affairs of the National Multi Housing Council, the country's principal trade group for rental property developers, owners and managers. “It actually makes things worse, rather than better” by sweetening the pot further for ownership while ignoring tenants – the vast majority of whom are also non-itemizers.

“Many renters are under the same economic duress as owners,” Arbury said.

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