A nail in the coffin of housing?

Dean Foust

I'm struck by how little attention was paid last week to the proposals released by a special commission Bush created to address the coming train wreck created by the Alternative Minimum Tax. (This is a whole separate story, but in short, Congress created the AMT to ensure that fat cats taking exorbitant numbers of deductions paid a minimum amount of tax. But because the AMT was never indexed for inflation, in coming years a lot of middle-class taxpayers in high-tax states like New York and California are going to suddenly be eligible for the AMT--which will cause their tax burdens to shoot up.)

Bush asked the special commission to offer changes to the tax code to offset the revenue lost by indexing the AMT. And some of the biggest changes would potentially hit the housing market quite hard...

For readers seeking a broader summation of the proposals--and their consequences--I provide this link to an article on Bloomberg.com

But in short, the panel offered a couple of proposals that would affect the mortgage interest deduction. Since the tax code allows you to deduct up to $1 million in mortgage interest, the obvious sentiment is that taxpayers are subsidizing the purchase of small mansions by weathy individuals. (Okay, I can already anticipate that New York and California readers will email to tell me how little $1 million buys in those markets.) Among the proposals: Capping the mortgage interest at $350,000, restricting interest write-offs to 25% of income, or creating a tax credit for mortgage interest so that every taxpayer would receive the same deduction.

Inasmuch as politicians are desperate to fix the AMT problem, there's no guarantee these ideas will be implemented--particularly since next year is an election year. And I can see Democrats defending the mortgage deduction and then forcing Republicans to defend the tax cuts for the wealthy. But the commission's proposals are something every homeowner should focus on, especially if you're someone who took out a $450,000 mortgage to buy that $550,000 home in a high-priced market like NY or California...

Before it's here, it's on the Bloomberg Terminal.