Many real estate tax breaks are politically untouchable

Nation's Housing

February 06, 2005|By KENNETH HARNEY

IT'S FEDERAL tax reform season at the White House, with a new presidential commission hard at work drafting a potentially radical streamlining of the Internal Revenue code by midyear.

But President Bush has pulled some of the biggest tax system goodies off the reform table. Tops on the list of untouchables are the extensive benefits that American homeowners receive annually in the form of deductions from their federal income tax filings.

How big are those benefits? Very. Congress' bipartisan Joint Committee on Taxation recently toted them up and found that homeowners will receive more than $116 billion in direct tax subsidies this year.

Although individual homeowners might not feel subsidized, Congress has for years rewarded them - but not renters - with tax preferences as a matter of public policy. And with the homeownership rate approaching a record 70 percent, that policy has been highly effective.

Now to the revenue costs of stimulating all of that home buying. According to the joint committee, American homeowners this year are expected to receive:

$72.6 billion in tax deductions for their mortgage interest expenses. The tax code allows homeowners to write off interest on first and second mortgages - including equity lines and loans - up to $1.1 million in mortgage debt.

That has encouraged millions of Americans to convert billions of dollars of nondeductible credit card debt and auto loans into tax-subsidized home-equity debt. At the same time, interest deductibility on primary mortgages has helped buyers afford ever-larger loans on ever-pricier houses. Renters receive no such subsidies.

$22.9 billion in tax benefits through exclusions of capital gains on sales of principal residences. This category has ballooned since 1997, when Congress first sanctioned tax-free treatment of up to $250,000 (for single filers) or $500,000 (for married joint filers) on profits from home sales.

The $250,000 to $500,000 exclusions are available on homes owned for at least 24 months and can be used without limit every 24 months. Even homeowners who sell in less than 24 months can pocket substantial profits tax-free if the sale was prompted by employment or health changes, or by "unforeseen circumstances."

$19.6 billion in write-offs for local property taxes paid on owner-occupied residences.

About $1 billion in interest subsidies on local and state bond programs that provide low-cost mortgage money for moderate-income homebuyers.

Tax preferences for homeownership account for a significant chunk of the federal deficit. But they are so much a part of home prices, mortgage affordability, housing construction and local revenue systems that virtually no politician on Capitol Hill - or in the White House - suggests publicly that they need to be pared back or terminated.

When the joint tax committee examined distribution of mortgage interest preferences last year, it found that people in the highest income bracket, with $200,000 or more in annual income, accounted for fewer than one-half of 1 percent of homeowners who took mortgage interest deductions. But they received 22 percent of the $70.2 billion in mortgage interest tax write-offs that year.

That shouldn't be shocking. Those homeowners tend to pay the biggest mortgage bills and are in the highest tax brackets, where deductions provide heftier savings. But the distribution pattern changes further down the income ladder.

Homeowners with incomes between $75,000 and $100,000 comprised 19.3 percent of those taking write-offs and pocketed 18.2 percent of the deductions. In the next bracket down, homeowners with incomes between $50,000 and $75,000 were the biggest single group who took deductions - 26.4 percent - and got 16.1 percent of the $70.2 billion total. Owners with incomes of $30,000 to $40,000 accounted for nearly 10 percent of homeowners claiming mortgage interest write-offs and received 3.1 percent of the tax savings.

The same distribution pattern holds for other homeowner tax subsidies. Top income households made up 3.8 percent of homeowners claiming property tax write-offs last year and received 15 percent of the total. At the other end of the spectrum, homeowners with incomes of $30,000 to $40,000 totaled 9.4 percent of those taking property tax write-offs and ended up with 3.7 percent of the benefits.

Whatever your philosophy on numbers like these, remember that barring some distant political revolution on Capitol Hill, homeowner tax subsidies are here to stay. You might hear about proposals to rein them in later this year, by putting a lid on mortgage interest deductions or scaling back capital gains exclusions, for example. But even before you hear about them, they will be dead politically.

Ken Harney's e-mail address is

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