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The Spokesman-Review Newspaper
Spokane, Washington  Est. May 19, 1883

Mortgage interest deduction should be safe

Tom Kelly Special to The Spokesman-Review

SAN FRANCISCO – Every sports franchise has its untouchable player; every business its prized asset. That’s why it came as no surprise when the mention of possibly eliminating the mortgage interest deduction for primary residences caused a huge uproar at the recent National Association of Realtors annual convention.

The mortgage interest deduction, viewed as a primary incentive to home ownership, was put on the table recently by a commission appointed by President Bush. Also up for discussion is the elimination of state and local property taxes as income tax deductions.

Given the need to rebuild New Orleans and the Gulf Coast, coupled with rising interest rates and softer housing markets, isn’t this a curious time to discuss the chance of taking away a long-standing housing carrot?

“In my opinion it’s a terrible timing — it’s almost irresponsible,” said David Lereah, chief economist for the National Association of Realtors. “That would do severe damage to a lot of the local markets across the nation. We are looking at probably a 10 to 15 percent drop in home prices” if the proposals become part of a new tax plan.

The possibility of eliminating the mortgage interest deduction is rather remote, analysts say. John Tuccillo, who once held Lereah’s title as chief NAR economist, said next year would be an especially difficult time to pull off such a surprising change.

“Of course, the Realtors will oppose,” Tuccillo said. “That opposition, plus that of the National Association of Home Builders, will probably be enough to sink the idea. More importantly, 2006 is a Congressional election year. And, historically, no major tax bill has passed in an even-numbered year.”

The mortgage-interest deduction is not a dollar-for-dollar tax deduction; it reduces taxable income. What has been recently proposed is disallowing federal tax deductions for first and second mortgages and replacing those write-offs with a 15 percent credit on some mortgage amounts. (The mortgage interest deduction is a combined f $1.1 million on first and second homes.) The 15 percent credit would only be for mortgages up to $359,650. Not only would interest on home-equity loans no longer be tax-deductible, but also out the window would go deductions for state and local property and income taxes.

If President Bush wanted to chip away at the mortgage interest deduction, why wouldn’t he start with second homes? Far fewer Americans own a second home compared to the number of primary residences.

“Bush will go after the second home deduction, but don’t forget that most members of Congress own two homes,” Tuccillo said. “Will they gore their own oxen? And does Bush have the political capital to get something like that through?”

According to Al Mansell, the 2005 NAR president, eliminating the mortgage interest deduction would hurt middle-income families the most. IRS tax return data from 2003 shows 52 percent of the families who claim the mortgage interest deduction have household incomes between $60,000 and $200,000.

“Housing is the engine that drives this economy and to even mention reducing the tax benefits of home ownership could endanger property values,” Mansell said. “The tax deductibility of interest paid on mortgages is both a powerful incentive for home ownership and one of the simplest provisions in the tax code. It should not be targeted for change.”

Mansell said that if the mortgage interest deduction were changed, the typical homeowner could lose $20,000 to $30,000 in housing equity.

Lereah kept returning to the “poor timing” theme. The NAR is forecasting that home appreciation will slow from a nationwide average of more than 12 percent this year to only about 5 percent in 2005. While he views this as a “soft landing” for many markets, others will have a more difficult time.

“Some markets are more susceptible to interest rate risks and shock,” Lereah said. “I cannot guarantee that there will be no hard landings.”