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The Nation's Housing

Tax Benefits Still Generous for Homeowners, But Biggest Incomes Earn the Biggest Share

By Kenneth R. Harney
Saturday, February 5, 2005; Page F01

It's federal tax-code-writing season at the White House, with a new presidential commission hard at work drafting a potentially radical streamlining of the Internal Revenue Code by mid-year.

But President Bush already has pulled some of the biggest tax system goodies off the table. Tops on the list of untouchables: the benefits that American homeowners receive in the form of deductions from their federal income tax filings.

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How big are those benefits? Very. Congress's bipartisan Joint Committee on Taxation recently totaled them up and found that in 2005, homeowners will receive more than $116 billion in direct tax subsidies. Although individual homeowners may not feel subsidized, the fact is that Congress has for years rewarded them, but not renters, with tax preferences as a matter of public policy. And with the homeownership rate approaching a record 70 percent, that policy has been highly effective.

Now to the revenue costs of stimulating all that home buying. According to the joint tax committee, American homeowners this year are expected to receive:

• $72.6 billion in tax deductions for their mortgage interest expenses. The tax code allows homeowners to write off interest on first and second mortgages, including equity lines and loans, up to an aggregate $1.1 million of their mortgage debt. That, in turn, has encouraged millions of Americans to convert billions of dollars of nondeductible credit card debt and auto loans into tax-subsidized home equity debt. At the same time, interest deductibility on primary mortgages has helped buyers afford ever-larger loans on ever-pricier houses. Renters, by contrast, receive no such subsidies.

• $22.9 billion in tax benefits through exclusions of capital gains on sales of principal residences. This category has ballooned since 1997, when Congress first sanctioned tax-free treatment of up to $250,000 (for single filers) or $500,000 (for married joint filers) on home-sale profits. The exclusions are available on homes owned for just 24 months, and can be used without limit every 24 months. Even homeowners who sell within less than 24 months can pocket substantial profits tax-free, provided their early sale was caused by employment or health changes, or by "unforeseen circumstances."

• $19.6 billion in write-offs for local property taxes paid on owner-occupied residences.

• About $1 billion for interest subsidies on local and state bond programs that provide low-cost mortgage money for moderate-income home buyers.

Tax preferences for homeownership represent a significant chunk of the federal deficit, but they are so ingrained into home prices, mortgage affordability, housing construction and even local revenue systems that almost no politician on Capitol Hill -- or in the White House -- suggests publicly that they need to be pared back or terminated.

Who actually pockets the tax code's generous subsidies to homeowners? When the joint tax committee examined distribution of mortgage interest preferences during 2004, it found that people in the very highest income bracket, with $200,000 in annual incomes and above, represented less than one-half of 1 percent of homeowners who took mortgage interest deductions. But they received 22 percent of the $70.2 billion in mortgage interest tax write-offs that year.

That shouldn't be shocking. After all, those homeowners tend to pay the biggest mortgage bills, and are in the highest tax brackets, where deductions provide heftier savings. But the distribution pattern changes as you descend the income ladder:

• Homeowners with incomes of $75,000 to $100,000 made up 19.3 percent of those taking write-offs, but pocketed 18.2 percent of the deductions. In the next bracket down, homeowners with incomes of $50,000 to $75,000 were the biggest single group who took deductions -- 26.4 percent -- and received 16.1 percent of the $70.2 billion total. Owners with incomes of $30,000 to $40,000 represented nearly 10 percent of all homeowners claiming mortgage interest write-offs, but received just 3.1 percent of the total tax-savings pie.

The same distribution curve holds for other homeowner tax subsidies. Top-income households were 3.8 percent of all homeowners claiming property tax write-offs in 2004, but received 15 percent of the total. At the other end of the spectrum, homeowners with incomes of $30,000 to $40,000 were 9.4 percent of all those taking property tax write-offs, but ended up with 3.7 percent of the benefits.

Whatever your philosophical take on numbers such as these, remember: Absent some distant political revolution on Capitol Hill, homeowner tax subsidies are here to stay. You might hear about proposals to rein them in later this year -- putting a lid on mortgage interest deductions or scaling back capital gains exclusions. But even before you hear about them, they will be stone dead politically.

Kenneth R. Harney's e-mail address is KenHarney@earthlink.net.

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