Florida Real Estate Tax Proposals Irk Realtors

Nearing the end of its work, the Tax Reform Panel put together by President Bush is not sitting well with the National Association of Realtors (NAR). The organization recently voted to oppose proposals under consideration by the panel that it believes would drive down real estate values, have a devastating effect on the nation’s housing economy and negatively impact the nation’s economy.

The value of the nation’s residential property could decline 15% or more if President Bush’s tax reform panel’s expected recommendation to convert the mortgage interest deduction (MID) to a tax credit takes effect, based on preliminary projections by NAR’s Economic Research Division. The housing sector accounts for about 15% of the nation’s Gross Domestic Product (GDP).

Another proposal under consideration involves eliminating the tax deduction for second homes. This would affect at least 5% of the GDP. Last year, second homes accounted for 36%of all home sales.

The final report is expected tomorrow. The panel is looking into the following initiatives:

- Recommending that Congress convert the MID from a deduction to a tax credit;
- Reducing the $1 million cap on mortgages to the local FHA loan limit
- Repealing the deduction for property taxes, as well as other state and local taxes
- 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.

“Before these ill-considered proposals become official, we are raising the loudest possible alarms over their prospective economic impact,” said NAR President Tom Stevens of Vienna, Va., who took office today.

There is precedent for issues resulting from past tax reforms. 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% following passage of that legislation.

“We urge the president not to accept these proposals. They are bad for homeownership, 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 today funded new research to determine the economic effect of the panel’s recommendations, especially their impact on the value of residential and commercial real estate, and assess their impact on homeownership.

The NAR states that real estate be recognized as a long-term investment, so the tax system should reflect the stream of income and expenses associated with long-term investments. Deductions for the amount of the purchase price and the loss of interest deductions are, therefore, ill-advised for real estate investments. NAR also urges that the president and Congress preserve the deduction for state and local taxes, including property taxes.

A workable tax system, according to NAR, should:

• Treat home ownership as investment not consumption
• Encourage savings a and tax-based incentives for home purchases
• Eliminate penalties for using savings for home purchases
• Treat services associated with the purchase of real estate as part of the investment cost of the transaction, and not tax those services.