Realtors go to bat against expected real estate tax reform

Trade group fears widespread economic impact
Inman News
The National Association of Realtors board of directors voted this week to oppose proposals under consideration by President Bush's advisory Tax Reform Panel that the trade group's leaders say would drive down real estate values and harm the housing market and overall economy.

The value of the nation's residential property could decline 15 percent or more if the tax panel's expected recommendation to convert the mortgage interest deduction to a tax credit takes effect, according to preliminary projections by the association's Economic Research Division. The housing sector accounts for about 15 percent of the nation's gross domestic product.

Eliminating the tax deduction for second homes, another proposal under consideration, would impact at least 5 percent of the GDP, the association said in an announcement this week. Second homes accounted for 36 percent of all home sales last year.

The tax reform panel, which is expected to make its final report to the president today, is considering recommending that Congress convert the mortgage-interest deduction from a deduction to a tax credit; is also considering reducing the $1 million cap on mortgages to the local Federal Housing Administration loan limit (which can be as little as $170,000 and no more than $312,000 in high-cost areas such as Alaska, Hawaii, Guam or the Virgin Islands); repealing the deduction for property taxes, as well as other state and local taxes; and raising the amount of gain to be excluded on sale of a principal residence but reducing the frequency in which the exclusion can be taken, the trade group reported.

"Before these ill-considered proposals become official, we are raising the loudest possible alarms over their prospective economic impact. Housing, which has sustained the economy for the past five years, represents 15 percent of GDP," said Tom Stevens of Vienna, Va., who took office as the association's 2006 president on Monday.

"We are concerned not just for the housing economy but for the nation's economy as a whole. Not only do the recommendations being considered by the panel have the potential to impact the value of every home, whether it has a mortgage or not, but also they will drive down real estate values," Stevens said in a statement.

Consumers' nest eggs will be jeopardized because much of investment for retirement is tied to the equity consumers have in their home, he also stated.

Stevens said the Tax Reform Act of 1986 demonstrated that when the tax benefits associated with real estate ownership are curtailed, the value of real estate declines. The resulting loss of value in the commercial real estate sector was 30 percent following passage of that legislation.

"We urge the president not to accept these proposals. They are bad for home ownership, bad for real estate and bad for the American economy. NAR will vehemently oppose them should they be considered by Congress," Stevens said.

NAR's board on Monday voted to pay for new research to determine the economic effect of the panel's recommendation – especially their impact on the value of residential and commercial real estate, and assess their impact on home ownership.

The trade group's position is that real estate is a long-term investment, and that the tax system should reflect the stream of income and expenses associated with long-term investments. The association is urging the president and Congress to preserve the deduction for state and local taxes, including property taxes.

The board met on the final day of the 2005 Realtors Conference & Expo, held Oct. 28-31 in San Francisco. The event drew about 26,000 Realtors and guests, the association reported.