The tax attack

Posted by: Chris Palmeri on November 1, 2005

The President’s Advisory Panel on Federal Tax Reform, a nine-member bipartisan group created by President Bush in January and charged with figuring out a way to simplify the tax code, dropped a bombshell on the real estate industry in a 292-page report released today. Among its many suggestions, the report calls for reducing the ability of high-income homeowners to write-off mortgage interest. Current law allows homeowners to deduct up to $1 million in interest. As the report notes, the home interest deduction creates incentives for people to buy bigger houses and borrow against their home to fund other expenditures, as many Americans have done in recent years. The current system also benefits the wealthy disproportionately, because those in higher tax brackets deduct more. The suggested changes would give homeowners a tax credit equal to 15% of their annual interest payments. The deductions would be limited to regional caps, $412,000 based on current home prices. The changes would also require a homeowner to live in a residence for three out of five years (instead of just two) to quality for the $500,000 in tax-free capital gains on a home sale. To be fair to current homeowners, the new system would be phased in. All of these are just suggestions, of course. They are subject to debate by Congress and strong opposition from the real estate, mortgage and tax preparation industries. As the report notes, however, Americans spend 3.5 billion hours and $140 billion a year to comply with the current tax code. It sure should be simplified. To read the full report click here.

Reader Comments

Lord

November 2, 2005 2:32 PM

But simplification this is not. The commission seems to think simplification means the number of lines on the tax form, but actually it is the number of code, regulations, and instructions needed to fill it out. Why don't they propose a new IRS code limited to twenty pages with any addition requiring jettisoning something else? Now that would be simplification. As it is, amounts that change with location annually would add to the complexity. Phase in would add more complexity and there is no way to truly phase it in anyway as the price level would change in response. I guess they decided if people don't save enough, they should take away some of their wealth to provide a greater incentive. The whole point of this are the instructions Bush gave when constituting this commission, extend his tax cuts but maintain the effects of the AMT. Hardly reform at all.

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About

BusinessWeek editors Chris Palmeri, Prashant Gopal and Peter Coy chronicle the highs and lows of the housing and mortgage markets on their Hot Property blog. In print and online, the Hot Property team first wrote about the potential downside of lenders pushing riskier, "option ARM" mortgages and the rise in mortgage fraud back in 2005—well ahead of many other media outlets. In 2008, Hot Property bloggers finished #1 in a ranking of the world's top 100 "most powerful property people" by the British real estate website Global edge. Hot Property was named among the 25 most influential real estate blogs of 2007 by Inman News.

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