Realtors Raise Last-Minute Red Flags Over Tax Bill

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Realtors
are expressing concern over three measures that exist in either the House or
the Senate versions of the Republican tax cut bill and have sent a letter to Orrin
Hatch (R-UT) and Kevin Brady (R-TX), chairs of the Senate Banking and House
Ways and Means Committees respectively, about these issues. The letter was sent
as a conference committee is about to begin discussions of changes to the bills
that will allow passage of a single version by both side of the Congress. Signed
by, current National Association of Realtors (NAR) President Elizabeth
Mendenhall, the letter stresses the important of homeownership to the U.S. economy
and says the Congress needs to keep in mind where their decisions “can create a
tremendously better outcome, not only for current and prospective homeowners,
but for communities and the economy.”

The first concern is a revision to a capital gains
exclusion
for the sale of a principal residence which was added to the tax code
in 1997.  Under that provision a
homeowner can exclude from capital gains taxes a profit of $250,000 (or
$500,000 for a couple filing jointly) if the home has been owner occupied for two
of the most recent five years preceding the sale.  Not only does this provision shelter a
substantial amount of housing wealth, it also eliminated the need for
homeowners to maintain tenure-long records of money spent on capital
improvements to the home.  The bill under
consideration would change the period of occupancy to five of the last eight
years and add income limits for eligibility.

Mendenhall said the existing provision is simple,
straightforward, and greatly encourages the buildup of household wealth.  Increasing the timeline “will create hardship
to millions and unfairly penalize them by changing the rules in the middle of
the game.”  Experienced Realtors, she
said, know that most people sell their homes because of legitimate and pressing
needs such as a job-related move or a change in family size. “Further, the
income limits in the House bill would punish many in higher-cost areas of the nation
simply because they happen to live where incomes, and the cost of living, are
above the average.”

In addition, some portion of those affected
would be less likely to sell their homes, exacerbating the low inventory problems
currently hampering many markets.  She
said the association’s research shows that as much as 22 percent of recent
sales were by homeowners who had owned their homes for two to five years.  “If just one in five of these affected
homeowners choose to forgo a trade-up purchase of another home, GDP could
decline by more than $7 billion per year,” the letter says.

The second area of concern is a proposed reduction of
the cap on mortgage interest deductibility. Currently that limit is $1 million
which the House bill would cut in half.  This, Mendenhall says, would have an immediate
and very negative impact on many high cost markets.  “Home buyers in these areas often have little
choice but to take out a very large mortgage, simply because finding a
residence priced below the limit that meets their needs is practically
impossible.”  That this cap lacks an
index for future inflation guarantees the limit “will pinch more and harder
over time.”  NAR estimates that in 20
years fully a third of the U.S. housing stock will be valued over
$500,000.  “Responsible tax reform should
not unfairly punish more and more taxpayers simply because of inflation.”

Mendenhall also urged that the conference, as it seeks
ways to make the limits on the deductibility of state and local taxes (SALT)
less “unsavory,” also include income or sales taxes in the mix.  There is a concern that if property taxes are
the only ones that will be deductible, she said, it will encourage state and
local governments to shift more of the tax burden onto real property owners.

NAR advocates for two other areas that appear in the Senate
bill.  One is a provision which would
adjust the depreciable lives of real property. 
NAR says this would lower barriers to investment in real estate and thus
generate more economic growth.  The Senate’s
version for pass-through entities better matches the tax rate reduction that
corporations receive under the bill than does the House bill, and would be less
likely to incentivize Realtors, brokers, and developers to convert to corporate
status.  



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