The Community Home Lenders Association is very supportive of the goals of the pending House and Senate tax bills of providing tax relief for individuals and corporations and simplifying and reforming the tax code. And if this means reforming existing homeownership tax provisions in order to help finance these tax cuts, that is fine with us.
Unfortunately, the combination of almost doubling the standard deduction, eliminating deductions for state income tax, and limiting or eliminating deductions for property taxes will mean that less than 10% of homeowners will use the mortgage interest deduction – the key tax incentive driving home purchases. This could dramatically reduce home purchases, our homeownership rate, and ultimately home prices.
Homeownership is a vital part of the economy, contributing roughly 15% of GDP. The importance of the housing market to the overall economy was vividly demonstrated by the 2008 housing collapse, which resulted in millions of Americans losing their home to foreclosure, a multi-trillion dollar bailout of our largest financial institutions, and the worst recession since the Great Depression.
For those reasons, CHLA is opposing the current versions of House and Senate tax reform – unless substantive changes are made to ameliorate their negative impact on housing. But CHLA is not just raising concerns, we have a proposed solution.
Last April CHLA first wrote Congress to suggest a mortgage interest credit. This week, in letters to House and Senate leaders, we provided details for our proposal. It would restore important tax incentives for home purchases and homeownership through a non-refundable tax credit of 15% for combined mortgage interest and property tax payments on primary and second home residences.
To avoid double dipping, the credit would only be available for taxpayers that use the (new and increased) standard deduction. To limit the revenue loss and more closely mirror the current tax code, the credit would be limited to only interest and tax payments which, when combined with state and local income tax payments, exceed $13,000 for married couples ($6,500 for individuals). Because of this feature, our proposal would also cut taxes for the very families experiencing a tax increase under the House and Senate bills due to the loss of deductions for MID and property taxes.
What about other reforms? Both tax bills end tax benefits for interest on second homes. CHLA opposes this as this could have a devastating effect in areas with higher concentrations of second homes. More to the point, it is arbitrary to allow a tax benefit on a $500,000 home, but not on both a $300,000 primary and $200,000 second home. But, CHLA is open to reducing the current $1 million cap on mortgage interest.
CHLA is also sympathetic to reforms of the capital gains exclusion for profits on sale of a principal residence – such as phasing out the exemption for couples with AGI over $500,000 and doing something to limit excessive uses of multiple properties. Both tax bills tighten the principal residence requirement from two of the last five years to five of the last eight years. CHLA believes this is too restrictive. Why deny the benefit to a family living in a home one week shy of five years? Instead, CHLA would suggest a requirement of two of the last three years – and allow this only once in a five-year period when trying to use it for a former second home or investment property.
Finally, while CHLA appreciates that H.R. 1 would reduce the corporate tax rate, many of our members are Subchapter S Corporations, and therefore support the bill’s pass through treatment for such firms.
However, both bills exclude pass through tax treatment for certain “personal services” corporations, such as attorneys, accountants, and consultants. It is not clear whether independent mortgage bankers (IMBs) would receive such treatment under the personal services exclusion. CHLA has called on Congressional leaders to amend or clarify the bill to ensure that pass through tax treatment is afforded to IMBs – since they provide a tangible product (mortgage loans) and are labor-intensive.
While these restoring homeownership tax incentives would result in some revenue loss, CLHA believes that homeownership is too important to our citizens and to our economy not to make it a priority.
