Today, in a draft document titled “The Moment of Truth” the co-chairs of the President’s Deficit Reduction Commission proposed how the federal government should address ongoing budget shortfalls and an ever-growing national debt. This week, the 18-person commission is scheduled to vote on this report, which requires a 14-vote majority for approval.

Embedded in the 66-page draft is a proposal to significantly rewrite the federal tax code (figure 7 on page 31 gives the best explanation). Here are the four big tax changes proposed that would impact homeowners and REALTORS®:

  • Mortgage interest deduction (MID) would be capped at $500,000, and no deduction will be allowed for interest paid from a second residence or equity loans.
  • Continuation of standard deductions, but elimination of itemized deductions.
  • Change from a five to three income tax brackets, taxed at the following rates12%, 22%, and 28%. 
  • All capital gains and dividends will taxed at ordinary income rates, which will mean an increase for the two upper income brackets.

Regardless of the vote this week, Congress would still need to propose, debate and pass many of these recommendation before the President could sign any into law. The National Association of REALTORS® (NAR) has already announced its opposition to any tax reform plan that does not retain the deductibility of mortgage interest. NAR also opposes any effort to convert the mortgage interest deduction from a deduction to a tax credit, and firmly believes that the MID is vital to the stability of the American housing market and economy.

Specific government incentives for homeownership in this country have existed for more than 150 years. That’s because homeownership helps foster communities, creates social stability, builds wealth over the long term, and contributes significantly to the U.S. economy. Realtors® believe that anyone who is able and willing to assume the responsibilities of owning a home should have the opportunity to pursue that dream.

If modifications to the mortgage interest deduction are moved forward, beyond an attack on homeowners, this will also be a three-pronged attack on the middle-class, the state of California, and the next generation of homeowners. Changes to the MID to enhance federal coffers would simply be a transfer from state and local governments, including school districts, that rely heavily on property tax revenues. Many cities in Silicon Valley have median home prices far above $500,000. Under this proposal, the negative impact felt here locally will be unequivocally greater than in other parts of the nation.   

The tax deductibility of interest paid on mortgages is a powerful incentive for home ownership and has been one of the simplest provisions in the federal tax code for more than 80 years. In a new survey commissioned by NAR and conducted online in October 2010 by Harris Interactive of nearly 3,000 homeowners and renters, nearly three-fourths of homeowners and two-thirds of renters said the mortgage interest deduction was extremely or very important to them.