- The Washington Times - Tuesday, November 8, 2005

ASSOCIATED PRESS

That most sacred of tax breaks, the mortgage interest deduction that has helped millions of Americans buy houses, would vanish if President Bush and Congress follow the recommendations of his tax advisory board.

Nine analysts, tasked with developing simpler and fairer tax laws, concluded that the deduction does more for wealthier taxpayers than for people struggling to buy a home. But mortgage bankers and real estate agents see irreparable harm if the tax break disappears.

The National Association of Realtors estimated that housing prices could decline 15 percent.

“You’re going to be taking away from middle America,” said David Lereah, the association’s chief economist. “Everyone, whether you use the mortgage interest deduction or not, the value goes down. You’ve just reduced the retirement nest egg for everyone.”

The current tax break lets homeowners deduct interest paid during the year on a mortgage up to $1 million and a home-equity loan worth up to $100,000. Homeowners also benefit from breaks that let taxpayers deduct state and local property taxes from the federal bill.

Almost 36 million taxpayers claimed the deduction in 2003, according to the most recent statistics compiled by the Internal Revenue Service (IRS).

The President’s Advisory Panel on Federal Tax Reform urged the administration to eliminate the deduction and replace it with a credit worth 15 percent of interest paid during the year. They would scrap the deduction for property taxes, too.

Mortgages eligible for the tax break would be limited by a formula reflecting the average regional price of housing. If in place today, that range would spread from $227,000 to $412,000. Mortgages for second homes and interest paid on home equity loans would not be eligible for the credit.

Taxpayers who already own homes would have five years before they would have to use the new credit. During the transition, a taxpayer still could take a deduction but the size of the mortgage eligible for a tax break would fall gradually. At the end of five years, everyone would be using the proposed credit.

Former Sen. Connie Mack, Florida Democrat and chairman of the tax panel, said that fewer than 5 percent of mortgages in the nation exceed the proposed cap.

“It is a fair plan. It shares the benefits,” he said.

For homeowners with a small mortgage who do not itemize their deductions, the credit means a new tax benefit defraying the cost of housing.

Taxpayers who bought $1 million homes expecting a generous tax break could be in for a shock, said Michael Fratantoni, senior director of single-family research and economics at the Mortgage Bankers Association.

“That’s going to really bite,” he said.

Greg McBride, senior financial analyst at Bankrate.com, said the proposed credit would not help homeowners in regions of the country such as New York and California, where housing prices have skyrocketed.

“It seems to ignore the plight of a first-time buyer in an expensive market,” he said.

Because the panel would convert the deduction to a credit, taxpayers who pay income tax at marginal rates greater than 15 percent would see their benefits shrink.

Clint Stretch, director of tax policy for Deloitte Tax, calculated that housing would become more expensive, for example, for a family carrying a $500,000 mortgage and earning income in the 25 percent tax bracket. The proposal would take away $4,400 of the tax benefit.

Mr. Stretch said the shock might be as much psychological as financial.

“It also has a piece of American dream about it,” he said. “It’s not just what people get now, but what they hope and dream they’re going to have someday.

“I think a lot of taxpayers who would never have a mortgage above the [limits] sure hope they would.”

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