A Message from the President with Mike Theo: Election Aftermath

 Mike Theo  |    October 09, 2014

Elections have consequences. While the outcomes of some races in November are forgone conclusions, many other elections remain toss-ups even at this late date. Put control of the United States House of Representatives in the first category. Put control of the U.S. Senate in the latter

Whether both Houses of Congress are controlled by Republicans or whether we continue with government with Democrats retaining control of the Senate, one thing is certain: one or both houses of Congress will engage in a serious debate over federal tax reform when the new session begins in January 2015. And regardless of who’s in the majority or the minority, that debate will include many issues that directly impact the real estate industry. 

It is clear that many Republicans, including Wisconsin’s Congressman Paul Ryan of Janesville, favor major reforms that will significantly lower the income tax rate for both individuals and businesses. A discussion paper with ideas on how to accomplish this was released in February by Congressman Dave Camp, the Michigan Republican who chairs the tax writing House Ways and Means Committee. Most Washington observers believe that after the elections, Ryan will succeed Camp as chairman of this all-important committee. Ryan has voiced support for much, but not all, of the Camp plan.

To achieve lower and less complicated taxes, lawmakers will have to modify or eliminate many important and long-standing deductions and preferential tax treatments, many of which directly impact the real estate industry. These include changes to the very popular mortgage interest deduction (MID), deductions for state and local taxes, increasing the standard deduction, capital gains taxes, taxes on the sale of a principal residence, mortgage debt forgiveness, depreciation on commercial property, commercial property like-kind exchanges and depreciation recapture, just to name a few. While lower rates will help mitigate the loss or reduction of existing tax benefits, the trade-offs will create many winners and losers and create uncertainty that can be especially damaging in this real estate and macro-economic environment. 

How will all this impact real estate markets and you? Consider just two of the real estate changes in the Camp tax proposal. First, the Camp plan would limit, but not eliminate, the MID by reducing the mortgage loan limit from the current $1 million to $500,000 over four years, and would apply to debt incurred after 2014. Older, existing mortgages would be grandfathered. Moreover, interest on new home equity loans would no longer be deductible. The $500,000 limit would not be indexed for inflation.

In the short run, this proposal doesn’t seem all that bad to some, particularly in states like Wisconsin where our housing is generally more affordable than many other parts of the country. In higher-priced markets, the impact would be immediate and damaging. In the long run, however, this proposal would be harmful to many more markets and households. Because real estate prices are expected to increase over time, an unindexed threshold of $500,000 would steadily reduce the value of the deduction over time. The National Association of REALTORS® projects that within 10 years, over 25 percent of U.S. homes will have values above $500,000. The long-term growing impact of this proposal is reminiscent of the Alternative Minimum Tax (ATM) that Congress intended to impact only the very wealthy when created but now impacts many families with only moderate means.

A second example from the Camp plan is the repeal of the deduction for state and local taxes paid. The ability to deduct real estate taxes is a major tax incentive for owning a home, particularly in states like Wisconsin with high property taxes. Perhaps even more devastating is that this change would significantly decrease the number of homeowners who would have enough deductions to itemize on their tax returns because individuals would also lose the ability to deduct state and local income or sales tax. When combined with another Camp proposal to consolidate the current standard deduction and the personal exemption into one much larger standard deduction, this change strikes a massive blow to the current tax code’s incentives for homeownership.

There is little doubt that the federal tax code is in dire need of reform. We will have a ringside seat to these discussions as Congressman Ryan leads those efforts in the House. However, there is also little doubt that significant tax reform can be achieved without impacting existing provisions in the tax code that promote homeownership. Tax changes therefore must be very carefully considered. Supreme care must be given to how these changes impact both the economy as a whole as well as the dreams of American families everywhere and of all ages to own their own home. And careful consideration must also be given to the impact such changes will have on families, on children, on neighborhoods, on schools, on crime and generally on the quality of life in communities large and small across this nation — for each of these are directly impacted by homeownership.

What can you do? In the aftermath of the November elections, stay informed, stay engaged and be a resource for elected officials so that they can better understand what you already know from your daily lives — that tax reform is vitally important, but so too is a vibrant real estate market and the American dream of homeownership.

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