You may have seen reports about a major tax reform proposal floated recently by Rep. Dave Camp of Michigan, the chairman of the House Ways and Means Committee.
But you probably didn’t see the grisly list of long-standing home real estate tax benefits that would be eliminated or sharply reduced under Camp’s plan.
Here’s a quick overview. But first, some basics:
• This is no back-of-the-napkin set of proposals. Camp and his committee – the primary tax-writing panel in Congress – have been working on this for two years. They’ve held extensive public hearings and done significant research.
• Though Camp’s reform package has zero chance of enactment in an election year, many of its core concepts are likely to reappear on Capitol Hill as early as 2015, when new chairmen at both Ways and Means and the Senate Finance Committee take up fundamental tax reform.
• Even the most die-hard proponents of real estate tax benefits concede that at some point, with the right combination of lower federal income tax brackets and higher standard-deduction levels, housing’s special carve-outs in the tax code will be less compelling to many homeowners. Why itemize when you can just take the standard deduction and save more? Once this sinks in, the political support for retention of owners’ unique tax privileges in the code will begin to crumble.
So what did Camp propose? For the vast majority of individuals and corporations, enticingly lower marginal rates of 10 percent and 25 percent, plus a substantially increased personal standard deduction – $22,000 for married joint filers, $11,000 for singles. Individuals with annual incomes above $400,000 and joint filers above $450,000 would pay taxes at a marginal rate of 35 percent.
In exchange, say bye-bye to the mortgage interest deduction in its current form. The $1 million limit on mortgage amounts that qualify for interest deductions would phase down to $500,000 in four annual steps, with no indexing to inflation. This would effectively diminish its value year after year as inflation takes its bites.
The good news on interest deductions: Anyone with an existing mortgage of $500,000 or higher on the date the tax bill takes effect would be grandfathered for the life of the loan. The bad news: Interest write-offs on home equity borrowings, currently limited to $100,000, would be prohibited unless the money was being used to improve your property.
Another set of changes Camp would make: He’d revise the present $500,000 and $250,000 capital gains exclusions for profits on sales of home by joint filers and single filers, respectively. Under today’s rules, you can claim a tax-free exclusion once you’ve owned a home for two years out of the preceding five years and you can do so once every two years. Under Camp’s proposal, you’d need to own your house for five out of the preceding eight years to claim a tax-free exclusion and you could only exercise this privilege once every five years. Capital gains exclusions for home sellers with upper incomes – $250,000 a year for singles and $500,000 a year for joint filers – would be phased out altogether over a period of years.
Besides these, Camp’s tax bill would:
• End all deductions for local property taxes, which he considers subsidies for excessive spending at the local government level.
• Eliminate credits for owners who make energy-saving improvements to their homes.
• End penalty-free withdrawals from IRAs to help fund first-time home purchases.
• Leave in limbo popular mortgage debt forgiveness tax benefits used by large numbers of short-sellers and foreclosed owners in the past several years. Camp’s plan is silent on extending the benefits – which are currently expired, awaiting extension – but in this case silence would be fatal.
• Kill tax federal tax exemptions for state and municipal bond programs used to fund mortgages for moderate-income families.
Bottom line: Though preliminary action on tax reform is at least a year away, homeowners need to grasp a sobering, emerging reality: To pay for a streamlining of the ballooning federal tax code and provide lower rates on income, there’s a chance that Congress will demand that you give up long-entrenched tax subsidies that have put homeownership on a pedestal, supported prices and sweetened the household finances of millions of Americans for decades.
Whoa. Didn’t we all assume that homeownership is politically sacrosanct? Right, but when the chief Republican tax writer in Congress proposes throwing out most of those perks, you’ve got to re-examine that assumption.