The tax attack

Chris Palmeri

The President's Advisory Panel on Federal Tax Reform, a nine-member bipartisan group created by President Bush in January and charged with figuring out a way to simplify the tax code, dropped a bombshell on the real estate industry in a 292-page report released today. Among its many suggestions, the report calls for reducing the ability of high-income homeowners to write-off mortgage interest. Current law allows homeowners to deduct up to $1 million in interest. As the report notes, the home interest deduction creates incentives for people to buy bigger houses and borrow against their home to fund other expenditures, as many Americans have done in recent years. The current system also benefits the wealthy disproportionately, because those in higher tax brackets deduct more. The suggested changes would give homeowners a tax credit equal to 15% of their annual interest payments. The deductions would be limited to regional caps, $412,000 based on current home prices. The changes would also require a homeowner to live in a residence for three out of five years (instead of just two) to quality for the $500,000 in tax-free capital gains on a home sale. To be fair to current homeowners, the new system would be phased in. All of these are just suggestions, of course. They are subject to debate by Congress and strong opposition from the real estate, mortgage and tax preparation industries. As the report notes, however, Americans spend 3.5 billion hours and $140 billion a year to comply with the current tax code. It sure should be simplified. To read the full report click here.

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