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The Nation's Housing Column: Change is in air on tax breaks

To pay for a streamlining of the ballooning federal tax code and provide lower rates on income, there’s a chance that Congress will demand that home owners give up long-entrenched tax subsidies that have put home ownership on a pedestal.
By Kenneth R. Harney Published: March 8, 2014

— You may have seen reports about a major tax reform proposal floated last week by Rep. Dave Camp of Michigan, the chairman of the House Ways and Means Committee.

But you probably didn’t see the grisly list of long-standing home real estate tax benefits that would be eliminated or sharply reduced under Camp’s plan.

Here’s a quick overview. But first, some basics:

••  This is no back-of-the-napkin set of proposals. Camp and his committee, the primary tax-writing panel in Congress, have been working on this for two years. They’ve held extensive public hearings and done significant research.

•Though Camp’s reform package has zero chance of enactment in an election year, many of its core concepts are likely to reappear on Capitol Hill as early as 2015, when new chairmen at both Ways and Means and the Senate Finance Committee take up fundamental tax reform.

•Even the most die-hard proponents of real estate tax benefits concede that at some point, with the right combination of lower federal income tax brackets and higher standard-deduction levels, housing’s special carve-outs in the tax code will be less compelling to many homeowners. Why itemize when you can just take the standard deduction and save more? Once this sinks in, the political support for retention of owners’ unique tax privileges in the code will begin to crumble.

So what did Camp propose? For the vast majority of individuals and corporations, enticingly lower marginal rates of 10 percent and 25 percent, plus a substantially increased personal standard deduction — $22,000 for married joint filers, $11,000 for singles. Individuals with annual incomes above $400,000 and joint filers above $450,000 would pay taxes at a marginal rate of 35 percent.

In exchange, say bye-bye to the mortgage interest deduction in its current form. The $1 million limit on mortgage amounts that qualify for interest deductions would phase down to $500,000 in four annual steps, with no indexing to inflation. This would effectively diminish its value year after year as inflation takes its bites.

The good news on interest deductions: Anyone with an existing mortgage of $500,000 or higher on the date the tax bill takes effect would be grandfathered for the life of the loan. The bad news: Interest write-offs on home equity borrowings, currently limited to $100,000, would be prohibited unless the money was being used to improve your property.

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