Federal Tax IssuesAn Overview

Jed SmithManaging Director, Quantitative ResearchNATIONAL ASSOCIATION OF REALTORS®

North Carolina Real Estate Summit

Embassy Suites, Cary, North CarolinaJuly 16, 2013

Tax Reform—Blank SlateRemembering 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 (progressive,

equality); – Promoting Policy Objectives.

Focus on Major Tax Expenditures: $800 BillionFederal 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 DeductibilityStudies: Homeownership Promotes Communities

• Foundations of Democracy: Social Stability, Prosperous and Informed Citizenry.

• A Long History of Promoting Home Ownership.• Thomas Jefferson, FDR, and Subsequent Presidents.• Homeownership—Major Impact on Social Stability.• Homeownership Considered to be Highly Desirable.• 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.

Home OwnershipStudies: 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 community. – Participate in elections much more frequently than renters.– Volunteer more because they have a stake in the community.– Interactions with neighborhood much stronger.

HomeownershipStudies: Socioeconomics and Crime

• Socioeconomics.– Owners are happier and healthier than non-

owners.– Perceptions of self esteem and life satisfaction

higher.• 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 borrowing,

retirement.– Given current structure of taxes, the right thing to do.

Other Tax Issues

• Exclusion of gains on the sale of a principal residence. – 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 days.

CONCLUSIONS

• Federal Deficit an Important Issue.• Significant Disagreements in Congress Over

Expenditures, Taxes, and Role of Government.• Compromise Has Not Been a Major Goal

Recently.• Sweeping Changes Advocated.– Potential Disagreement Over Goals.– Major Changes Would Impact Major Stakeholders.