Tax Relief, Sans Itemizing
The giant federal housing and foreclosure relief legislation heading for enactment contains a little-noticed -- but potentially far-reaching -- change in real estate tax policy.
It would permit millions of homeowners who do not itemize on their federal tax filings to claim a deduction for at least a portion of their local property taxes -- up to a maximum of $500 for single filers and $1,000 for married owners filing jointly.
Intended as a one-year economic-relief measure for people who do not itemize, the new write-off is highly likely to become a permanent part of the tax code, tax experts say. Currently, it would apply only to tax returns filed on 2008 incomes and cost the federal treasury an estimated $1.2 billion to $1.5 billion for the year. The concept originally surfaced in February in the Senate's version of the national economic stimulus package but was left out of the final deal with the House.
According to an analysis of 2005 IRS data by the nonprofit Tax Foundation, only 35.6 percent of taxpayers -- tenants as well as homeowners -- itemize on their returns. In some states, it's less than 20 percent, such as in West Virginia, where just 18 percent of taxpayers itemized in 2005. Only in Maryland, a relatively high-income state, did more than 50 percent of taxpayers itemize.
Among homeowners nationwide, an estimated one-half itemize, but one-third of homeowners have no mortgage debt against their property, and therefore do not claim mortgage interest as a deduction.
The new legislation would effectively add another tax preference for people who own houses while offering nothing to those who rent. The idea, supporters say, is to provide greater fairness for a group of owners -- often seniors and lower- to moderate-income households -- who opt for the standard deduction but also pay local and state property taxes.
Critics of the plan say it's another example of the government's ongoing inequitable approach to housing policy -- overemphasizing the financial benefits for homeownership vs. renting. Some critics argue that heavy tax subsidies for ownership helped stimulate buyer mania during the boom years, along with zero-down and "stated-income" financing that put thousands of people into real estate they could not afford.
"We think [the new deduction] is terrible policy," said James Arbury, senior vice president for government affairs of the National Multi Housing Council, the country's principal trade group for rental property developers, owners and managers. "It actually makes things worse, rather than better" by sweetening the pot further for ownership while ignoring tenants -- the vast majority of whom are also non-itemizers.
"Many renters are under the same economic duress as owners," Arbury said. "But nobody is giving them new tax deductions."
The National Multi Housing Council has fought a long, unsuccessful campaign to persuade Congress to take a more even-handed approach in supporting taxpayers' housing choices.
"We understand why members [of Congress] would want to put more goodies in homeowners' baskets" in political terms, Arbury said. Owners outnumber renters roughly 2 to 1 and have influential lobbies such as the National Association of Realtors and the National Association of Home Builders pushing their interests. But renters ultimately end up paying for part of the subsidies that flow to owners, and critics such as Arbury say that's not fair.
The Senate version of the housing bill provided larger maximum deductions but also contained language clouding the use of the write-off in jurisdictions that raise property rates immediately after enactment of the legislation, through Dec. 31.
The House successfully demanded removal of those restrictions as the price of accepting the Senate's higher limits. Although specific procedural details were not spelled out in the legislation, owners who opt for the standard deduction on their 2008 tax filings are expected to be eligible for the new write-off benefit.
Kenneth R. Harney's e-mail address isKenHarney@earthlink.net.