Second-Home Deduction Future Depends on Congress Using ItRichard Rubin
Only a small percentage of U.S. taxpayers benefit from the ability to deduct mortgage interest on a second home. That group just happens to include many of the people who craft the nation’s tax laws.
Members of the congressional tax-writing committees are eight times more likely than the average American to own a second home with a mortgage, casting doubt on their eagerness to curb the tax break, according to data compiled by Bloomberg.
U.S. lawmakers are an ideal market for second homes: They’re wealthier than the typical person and they live and work in two places -- their home states and Washington. That will shape their approach to revising the tax code, said Bill Allison, editorial director of the Sunlight Foundation in Washington, which promotes government transparency.
“What you end up seeing out of Washington is a real disconnect between how Congress lives in Washington as one of the most affluent areas now, and how the rest of the country lives,” Allison said.
The Senate Finance and House Ways and Means committees are exploring the first rewrite of the U.S. tax code since 1986, and the chairmen of both panels have promised to scrutinize every tax break. As lawmakers try to lower marginal rates, that examination will include the estimated $8 billion a year that they could raise from ending the second-home mortgage deduction.
The lawmakers will start that process coming from a different financial place than many of their constituents do. More than 40 percent of members of the House Ways and Means and Senate Finance committees have mortgages on homes other than their primary home-state residences.
Examples are Finance Chairman Max Baucus’s Capitol Hill townhouse, Representative Tom Reed’s cottage on Keuka Lake in upstate New York and Representative Sander Levin’s home on Martha’s Vineyard.
About 5 percent of all homes in the U.S. are second residences, according to the National Association of Home Builders.
“We’re like millions of Americans,” said Reed, a 41-year-old New York Republican. “I have been very sensitive to recognizing mortgage deduction as a policy, a good real estate policy for America. It doesn’t sway me from a personal perspective. It’s about good policy.”
Reed said he and his 11 siblings inherited the lake cottage in his district from his mother. That arrangement didn’t work well, and he borrowed money to buy them out. He now owes between $100,000 and $250,000 on the cottage and between $50,000 and $100,000 on his primary home in Corning, where he was mayor before coming to Congress in 2010.
“This longstanding tradition is something that if we move away from we should do it very carefully,” he said. “And we should do it in a very well-thought-out manner.”
The mortgage-interest deduction, with an estimated cost of $72 billion in forgone revenue in 2014, is one of the largest tax breaks in the Internal Revenue Code and the subject of a real-estate industry lobbying campaign to protect it.
Taxpayers can deduct interest on mortgages of up to $1.1 million on as many as two homes, a “main home” where they live most of the time and a second home. At least for voting purposes, lawmakers declare their primary residences in their home states.
A rule that would constrain the deduction to primary residences would limit the break for them; a rule that limited the break to one home only would let some of them continue to benefit.
The Internal Revenue Service doesn’t require taxpayers to break out their mortgage interest by home, and the agency doesn’t have data on the cost of the break. The nonpartisan Tax Policy Center offers a rough estimate that repealing the deduction could generate $8 billion a year for the government.
More than half the benefit of the mortgage interest deduction overall goes to taxpayers making between $75,000 and $200,000, according to the Tax Policy Center. It’s only available to those who itemize their deductions.
The second-home break was one of the few that Mitt Romney, the 2012 Republican presidential candidate, suggested could be ended to pay for lower tax rates. It’s one of the specific ideas lawmakers offer when asked what breaks should disappear.
“If you want to know why it’s there, it’s there because of heavy lobbying,” said Dennis Ventry, a tax law professor at the University of California, Davis, who cites the influence of lawmakers from resort areas and not any real benefit in promoting homeownership. “So much of our homeownership subsidy has this component to it, this visceral symbolic component.”
Jamie Gregory, deputy chief lobbyist for the National Association of Realtors, said the “light bulb finally goes off” for lawmakers when they’re presented with data showing that 900 of the approximately 3,100 counties in the U.S. have more than 10 percent of their housing stock as second homes, according to the realtors’ group.
“As you start walking members through that, there’s a realization that this isn’t just some flip throwaway,” he said. “I really do believe members make their decisions more based on their districts than on what’s personally best for them.”
The break is in more jeopardy than at any time in the 27 years since Congress last revamped the tax code.
Baucus, who doesn’t have a mortgage on his family’s home in Montana, wants lawmakers to examine every tax break and is asking senators to make suggestions by July 26.
“Every provision we put back in the code needs to have a reason for being there,” he said in a statement.
This is the second year that lawmakers have required themselves to disclose the terms of their mortgages, a demand prompted in part by reports that Countrywide Financial Corp. had a “Friends of Angelo” program named for co-founder Angelo Mozilo that offered below-market rates to politicians.
Members of Congress must report mortgages on any property they own, regardless of whether it produces income. They must report only the value of homes that generate income, which means that those who own their second homes outright and don’t rent them don’t have to disclose them.
Lawmakers also don’t have to disclose their tax returns, making it impossible to know how much any of them benefit from the break.
Of the 63 members of the Ways and Means and Finance committees, 26 report mortgages on second homes, mostly in the Washington area. All except six members have filed forms covering 2012 that were due May 15; the others received extensions of the deadline.
The list of second-home owners with mortgages includes 13 of the 24 senators, who serve six-year terms, giving them an incentive to find permanent housing in the Washington area.
For example, Democrat Michael Bennet of Colorado, who has been in the Senate since 2009, has paid off the mortgage on his primary residence in Denver. He owes between $250,000 and $500,000 on a 30-year, 4.75 percent fixed-rate mortgage he took out in 2011 for a home in Washington.
Some have multiple mortgages. Representative Adrian Smith, a Republican, owes between $265,000 and $550,000 on his Washington home and as much as $50,000 on his residence in Gering, Nebraska.
Smith “believes everything must be on the table as the committee works to review the current code,” the congressman’s spokesman, Rick VanMeter, said in a statement.
Representative Jim McDermott, a Democrat from Seattle, said there should be a distinction between vacation homes and homes needed for work.
“When you have to live in two different places for your work, you really are in a difficult situation if you’re buying a place in each place, if you can’t deduct both of them,” said McDermott, who owes between $250,000 and $500,000 on his home in Washington. “It’s not a vacation home here in Washington, D.C.”
Representative Levin of Michigan, the top Democrat on Ways and Means, backed the second-home break during an April hearing, saying many residents of his suburban district have “small second homes” in the rural northern part of the state. Levin owes $405,802 on a home in West Tisbury, Massachusetts, on Martha’s Vineyard.
“This is a very wealthy class of people for the most part,” said Allison, citing 2011 data from the Center for Responsive Politics that puts the average wealth of senators at $11.9 million and House members at $6.5 million. “If the idea of Congress was that you have the butcher, baker, candlestick maker representing the people, we’ve come to a system where we certainly don’t have that anymore.”