If you’re a homeowner, sit down right now and write a thank-you note to Congress for your early holiday present. (Yeah, right.)
The 16-day government shutdown in the first half of October “put to rest any chance that several treasured homeowner perks will be eliminated by Congress – at least this year and probably in 2014,” writes Ken Harney at The Washington Post.
Tax perks could go on the block … eventually
Homeowners’ favored tax status includes federal tax write-offs for local property taxes, deductions for mortgage interest paid, deductions for second homes and capital gains exclusions.
While these perks are safe for the moment, keep in mind, if you’re thinking of buying a home, that these benefits aren’t guaranteed forever. A far-reaching package of tax reforms is under construction, led by House Ways and Means Committee Chairman Dave Camp, R-Mich. It could eventually put some or all of these write-offs on the table. But any action is a long time away.
“We expect to see changes” to existing real estate and mortgage-related write-offs in this tax reform legislation, J.P. Delmore, federal legislative director for the National Association of Home Builders, tells Harney.
Support for reform from all sides
Various blue ribbon commissions and panels have recommended limiting tax deductions over the years. President Obama proposed limiting the value of itemized deductions and certain exclusions for high earners, writes the nonpartisan Tax Policy Center.
Eliminating deductions, credits and exclusions (except for the health care tax credit) is key to U.S. Rep. Paul Ryan’s current proposal for a simplified tax code “that fits on a postcard with just two rates.”
The overall objective of the reformers is said to be a simpler tax system. The idea is that, while you might be hurt by the loss of homeowner tax perks, you could benefit from an overall lower tax rate.
“At the bottom line, so the theory goes, the country would get a much simpler system with lower tax rates on incomes but far fewer tax preferences that favor one group of citizens over another — one of the main critiques of current housing tax breaks,” Harney writes.
Meanwhile, don’t expect to see homeowners – and lobbyists representing building, banking and real estate interests – relinquish these perks quietly.
Homeowners’ 4 favorite perks
1. The mortgage interest deduction. This sacred cow lets homeowners deduct up to $1 million in mortgage interest, explains the Tax Policy Center. It costs the government about $70 billion a year, says the center in another article. In fact, many homeowners don’t use it. That’s because, to take advantage of it, you must itemize deductions when paying taxes, something only a third of taxpayers do, CNNMoney says. The deduction favors middle-class taxpayers, comprising 38 percent of their deductions, but only 19 percent of the deductions taken by wealthy taxpayers.
The Pew Charitable Trusts said in a recent report:
The mortgage interest deduction is one of the largest tax expenditures in the U.S. tax code but the rate at which it is claimed and the average amount deducted vary widely across and within states …. For example, the percentage of tax filers deducting mortgage interest ranged from nearly 37 percent in Maryland to 15 percent in West Virginia and North Dakota.
… In 2010, the average deduction ranged from a high of $4,580 per filer in Maryland to a low of $1,192 in North Dakota. The national average was $2,713.
2. Local property tax write-offs. Reformers often cite real estate property tax deductions to support their case, Harney says. “These write-offs cost the Treasury approximately $30 billion a year, and reformers argue that they are heavily skewed toward owners in high-cost, high-tax states such as California, Connecticut, New York, New Jersey and Maryland.”
3. Second-home deductions. Second homes, including vacation homes and rental property, also are eligible for the deduction of up to $1 million in mortgage interest paid. In case it’s not already obvious, this deduction favors those wealthy enough to own second homes.
4. Capital gains exclusion. This tax benefit lets you exclude from taxes up to $250,000 of your capital gain when you sell your primary residence. Married couples filing jointly can exclude up to $500,000. Singles who own property together can each exclude $250,000, says Nolo. To be eligible, you must have lived there at least two of the last five years before the sale. “You can use this exclusion every time you sell your primary home, as long as you own and live in the home for two years and haven’t sold another home in the last two years,” explains Kiplinger. Forbes busts myths about the capital gains exclusion here.
Still and all (as folks in my hometown say), our favorite homeowner perks might be safe from congressional action for quite a while.
Harney says, “Democrats and Republicans can barely work out temporary solutions for a single fiscal year’s budget, much less fundamentally remold a sprawling tax code that’s been getting more complex and more heavily influenced by special interests year after year.”