Homeowners reaping a tax-break bonanza

Nation's Housing

May 06, 2001|By KENNETH HARNEY

IF YOU'RE like millions of American homeowners and new buyers, you filed your federal tax returns a couple of weeks ago and are glad to be done with it.

As part of the process, you probably took advantage of some of the highly favorable provisions in the federal tax code that offer you special breaks simply because you bought, own or sold a home - mortgage interest deductions, property tax write-offs, capital gains exclusions.

Tax breaks like these are so hard-wired into the American housing system - and so connected with the country's current record-high homeownership rate - that hardly anybody even asks: How much money is involved here? How big is the financial subsidy implicit in allowing homeowners - but not renters - to cut their taxes through their choice of shelter? And who actually gets most of those benefits?

Two recent federal documents provide the answers. One is some fine print tucked away in the Bush administration's proposed budget for fiscal year 2002. The other is a report of "tax expenditures" by the bipartisan Joint Committee on Taxation, which advises House and Senate tax writers.

Totally apart from whether you're a strong believer in - or opponent of - tax preferences, consider these startling and little-publicized real estate facts:

The mortgage-interest deduction is projected to save homeowners a record $65.7 billion in the coming year. The savings represent uncollected taxes on their regular incomes that they'd otherwise have to pay if they didn't have a mortgage. It now ranks as the third-largest federal tax preference, right after pension funds and employer contributions for medical insurance.

Property tax write-offs for homeowners also represent a huge federal subsidy - an estimated $23.6 billion in the coming year.

Capital gains exclusions on home-sale profits will save homeowners nearly $20 billion in the coming year alone.

Rolled together, these three big breaks will put more than $109 billion into homeowners' pockets that wouldn't be there under a system that bestowed no special preference for choice of housing.

But who actually reaps the biggest benefits from the homeownership preference? Estimates from the Joint Committee on Taxation tell some of the story:

Mortgage-interest deduction tax savings are gobbled up mainly by people with household incomes of $100,000 a year or more. Roughly 59 percent of all the mortgage write-off savings flow to households in that bracket, even though they represent 32.2 percent of the total number of homeowning taxpayers claiming the mortgage interest deduction.

Homeowners with incomes between $75,000 and $100,000 represent 22.4 percent of homeowners filing for the mortgage write-off, but receive 20.5 percent of the savings. Homeowners in the $50,000-$75,000 income bracket represent 25.4 percent of all mortgage deduction claimants, but receive just 13.5 percent of the savings.

Lower- to moderate-income homeowners, who are far less likely to itemize on their tax returns, represent proportionately smaller percentages of mortgage-interest deduction claimants, and barely get any of the savings. Households with incomes of $30,000 to $40,000 account for just 6.7 percent of mortgage-interest deducters, and receive less than 2 percent of the benefits. Homeowners with incomes of $20,000 to $30,000 represent slightly less than 3 percent of mortgage write-off claimants, but get just over half of 1 percent of the tax savings.

The breakdown on property tax deductions is similar: The top 33 percent of homeowning income-earners gets 61 percent of the savings. Folks at the other end of the income scale get very little. No estimates were available for who gets what of the $20 billion in home-sale capital gains benefits. But in a system that provides up to $500,000 in tax-free profits for home sellers who qualify, you can guess how the pie gets sliced.

What's the point here?

First, since this issue so rarely sees the light of day, it's good to get the numbers out.

Second, from purely a homeowner's perspective, the fact that the federal tax system is so generous can only be good news. It makes homeownership easier to afford, raises the economic value of owning a home and provides millions of people tax-free cash when they sell their shelter.

From the perspective of those who don't own homes, on the other hand, the sheer size of the federal subsidies to homeowners can only be sobering, if not enraging. Renters get virtually no subsidies for their choice of shelter.

No wonder that when Harvard University's Joint Center for Housing Studies looked at the net wealth of homeowners last year vs. that of renters, it documented vast differences. Senior homeowners and renters - those 55 years and older - show how wide the gap gets: Homeowners had a median net wealth of $177,400 and home equity of $80,000.

Renters, by contrast, had a median net wealth of $5,500 and zero dollars of equity.

Kenneth R. Harney is a syndicated columnist. Send letters in care of the Washington Post Writers Group, 1150 15th St. N.W., Washington D.C. 20071.

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