Home ownership is the cornerstone of the American dream. Many families are able to purchase their homes because of the tax deduction provided for home mortgage interest payments. This deduction has enabled millions of Americans to complete their dream of buying a home and enjoy a degree of financial stability and security. Housing, still one of the least taxed investments in the United States, may be headed for a considerable change if a Presidential Committee considers a change to the federal tax code.

President Bush has appointed an advisory panel on federal tax reform to consider among other things, changes to the current home mortgage interest deduction that could have a drastic impact in most housing markets. President Bush has asked the panel to recommend ways to simplify federal tax laws, redistribute the “burdens and benefits” of federal tax “in an appropriately progressive manner while recognizing the importance of home ownership and charity in American Society.” Whether or not the panel decides to recommend repealing entirely the mortgage interest deduction or simply establishing a limit on how much one can deduct such as the maximum mortgage guaranteed by the Federal Housing Administration (this limit varies by region) - one thing is for sure, the panels plan will be a hard sell! Congress may not pass harsh new limitations on mortgage interest deduction, but it may spark an interest in changing the current mortgage interest deduction standard - bottom line, added revenue to the Federal government would result from trimming the mortgage interest deduction.

Changes in the 1997 tax code made home ownership advantageous over other forms of investments. Effectively, Congress made most sales of primary residences tax-free. “One of the pillars of strength of the housing market is the fact of the tax advantaged nature of the asset” according to Anthony Chan, senior economist with JP Morgan Asset Management Holdings, Inc. The hot housing market has been a major reason for increased economic growth in our country and a large percentage of job growth can be attributed to this boom in housing. “It is this relative advantage for housing that may be called into question by the tax commission” according to Ryan Danmoyer of Bloomberg News. Members of the Presidents panel are considering numerous options ranging from cutting rates on dividends, interest and capital gains to streamlining current tax-free savings plans for retirement, education and health care - even forgoing the current income tax in favor of a system taxing consumption only. The toughest issue confronting the panel may be the mortgage interest deduction - long viewed as politically sacred.

Many feel the current mortgage interest deduction favors larger, higher valued homes and provides most of the benefits to the higher tax bracketed homeowners. Higher priced housing areas would feel an immediate impact of any mortgage interest reduction. In 1986, Congress enacted legislation removing numerous tax benefits from commercial real estate - within five years, commercial real estate values plummeted by 30 percent on average - similar erosion of values in the residential real estate market could result with any form of reduction in mortgage interest deductions. “One thing this panel can do is put ideas on the table that need to be discussed in the public realm” according to Elizabeth Garrett, professor at the University of Southern California, and member of the panel. Purchasing a home is the largest investment of most peoples lifetimes, and any reduction in mortgage interest deductibility would certainly impact the probability of that happening. “Repealing or limiting the mortgage interest deduction would create an economic tsunami throughout our society - in addition to home devaluation, a host of other industries - construction, financial services, home furnishings, etc. would experience severe downturns” according to Neil Abercrombie, Congressman from the state of Hawaii. Write your congressional representative and show your support of the current tax code provision relating to the mortgage interest deduction that we now have! If the mortgage interest deduction is repealed or limited, many families may fail to realize the cornerstone of the American dream.

Rich Rippetoe
The Platinum Group Realtors
Colorado Springs, CO

www.RichRippetoe.com