Federal Tax Issues
Managing Director, Quantitative Research
NATIONAL ASSOCIATION OF REALTORS®
North Carolina Real Estate Summit
Embassy Suites, Cary, North Carolina
July 16, 2013
Tax Reform—Blank Slate
Remembering Senator Robert Byrd
This Could be VERY Emotional: Who Wants to Volunteer?
• Focusing on Credits, Exclusions, Deductions.
– Legitimate Deductions to Stay.
– Special Interests to Go.
• Reducing Deficit and/or Tax Rates
• Focus On
– Promoting growth (jobs and standard of living);
– Making the tax code fairer
– Promoting Policy Objectives.
Focus on Major Tax Expenditures: $800 Billion
Federal Deficit Estimated at $642 to $759 Billion for FY2013
• Grand total of Estimated Tax Expenditures: $1.2 trillion.
– $151 Billion to businesses
– $1.05 trillion to individuals
• Major Tax Expenditures
– Employee Health Care: $117.3 Billion
– Dividends and Capital Gains: $146.2 Billion
– Benefits: $148.6 Billion
– Medical: $58.0 Billion
– Charitable: $28.8 Billion
– Child Credit: $56.8 Billion
– EITC: $59 Billion
– MID: $68.5 Billion
– Property Tax: $24.5 Billion
– Capital Gains: $22.3 Billion
– State and Local Taxes: $43.5 Billion
• Your Necessity is Someone Else’s Special Interest!
The Rationale for Mortgage Interest Deductibility
Studies: Homeownership Promotes Communities
• Foundations of Democracy: Social
Stability, Prosperous and Informed Citizenry.
• A Long History of Promoting Home Ownership.
• Thomas Jefferson, FDR, and Subsequent
• Homeownership—Major Impact on Social
• Homeownership Considered to be Highly
• Mortgage Interest Deduction: A Major Facilitator.
Why Advocate Home Ownership?
Studies: Educational Achievement
• Neighborhood Characteristics of Stable Housing Environment
Facilitate Desirable Outcomes.
• Staying in School.
• Decreased Teenage Pregnancy.
• Minimizing Bad Behavior.
• Sense of Greater Responsibility by Entire Family—focus on home
maintenance and financial skills.
• Residential stability.
• Impact on Younger Adults: Educational
Attainment, Incomes, Welfare Independence.
• Impact on Reading and Math Performance.
• Educational Outcomes Strongly Influenced by Homeownership
and Residential Stability.
Studies: Parenting and Civic Participation
• Parental School involvement.
– Frequency of reading to child.
– Child’s participation in Organized Activities.
– Screen Time (television and videogames).
• Civic Participation.
– Owners have a much greater financial stake in their
neighborhoods than do renters.
– Tend to remain in homes longer, stability to neighborhoods.
– Tend to maintain residence—quality of surrounding
– Participate in elections much more frequently than renters.
– Volunteer more because they have a stake in the community.
– Interactions with neighborhood much stronger.
Studies: Socioeconomics and Crime
– Owners are happier and healthier than non-
– Perceptions of self esteem and life satisfaction
• Homeownership—Impact on Crime.
– Homeowners have an incentive to deter crime.
– Homeownership and public Assistance.
– Property Maintenance and improvement.
Mortgage Interest Deductibility
• Current: Interest paid on mortgage debt of up to $1 million:
Principal residence, one additional residence plus up to
$100,000 of debt on home equity loans.
• Proposals for Change.
– Limit itemized deductions to 28% for upper income tax payers.
– Deficit Commission.
• Repeal the MID in favor of lower tax rates.
• (2) reduce the $1 million cap to $500,000.
• (3) eliminate the deduction for second homes.
• (4) convert the deduction to a 12% tax credit.
Mortgage Interest Deduction—Justified?
• The mortgage interest deduction (MID) is a remarkably
effective tool that facilitates homeownership.
– While only about 30% to 35% of all taxpayers in any given year
itemize their deductions, more than 70% of homeowners
utilize the deduction over the lifecycle.
– Eliminating the MID would cause a 15% decline in the value of
homes across the nation.
– Higher impact in high cost areas.
– Bulk of deductions go to middle class.
• Homeowners pay approximately 85 percent of income tax.
– For many homeowners, the major deduction.
– Homeownership key to middle class assets: basis for
– Given current structure of taxes, the right thing to do.
Other Tax Issues
• Exclusion of gains on the sale of a principal
– Joint return--exclude up to $500,000 of gain.
• Like-kind exchange rules.
– Firmly fixed in the tax law for decades.
– Permits the deferral of capital gains taxes, so long as
the taxpayer satisfies numerous requirements and
consummates both a sale and purchase within 180
• Federal Deficit an Important Issue.
• Significant Disagreements in Congress Over
Expenditures, Taxes, and Role of Government.
• Compromise Has Not Been a Major Goal
• Sweeping Changes Advocated.
– Potential Disagreement Over Goals.
– Major Changes Would Impact Major Stakeholders.