Legislation to expand tax deductions for the 2 million homeowners expected to refinance their mortgages this year could become law by December, its congressional sponsors say.
Two bills have been introduced in the House and one in the Senate to reverse an Internal Revenue Service decision earlier this year that prohibits deduction of points in the same year the mortgage was obtained unless the loan is used to buy or improve a home. A point equals 1 percent of the loan amount.
Denying the tax relief to owners who are refinancing is unfair, said Rep. Sherwood L. Boehlert (R-N.Y.), sponsor of one bill, which would give equal treatment to refinancers. Most of the thousands of people who are taking advantage of lower interest rates by refinancing their mortgages "are operating under the assumption that the points will be immediately deductible," Boehlert said. "Then the IRS penalizes them."
The IRS issued its ruling denying immediate deduction of refinancing points on May 13, months after the avalanche of refinancing began, triggering accusations that the agency's motive was to gain more money in the short term. Under the IRS ruling, the points paid on refinanced loans are deductible over the life of the loan. Tax lawyers already have said, however, that they believe the IRS ruling at least allows immediate deduction of points paid on any portion of refinanced loans that is used for home improvements.
Boehlert's bill and a similar measure introduced by Rep. Richard H. Stallings (D-Idaho) have a total of 104 sponsors in the House, with more expected. "Not one congressman has turned me down yet," Boehlert said.
Sen. David H. Pryor (D-Ark.) introduced a bill in the Senate because "he thinks the mortgage interest deduction is sacred, and refinancing points are as much a part of this as anything else," an aide said. All three measures have been referred to committees, but Boehlert said relief could come before the bills can come to a vote.
House and Senate conferees on the tax-law revision bills will be asked to add language to their final legislation that would require the IRS to treat points paid for refinancing the same as those paid for loans obtained to buy or improve a home, he said.
A House Ways and Means Committee staff aide said, however, that although the conferees technically can take up issues not in the original bills, "they tend not to do that." He said he did not expect any conference action on refinancing points because "no hearings have been held . . . and there may be significant revenue implications."
An estimate of what the change would cost the government has not been completed, but "our position is that . . . whatever revenue is lost will be made up over the period of a loan because there will be less interest to deduct" because of the lower interest rates, said Craig Sharon, an aide to Stallings.
If the change is not made in the tax bill conference, "there may be no movement until September," Sharon said.
The 1976 tax reform bill permitted homeowners to deduct points they paid when they obtained a loan to buy or improve a house, but did not mention refinancing. The omission probably was an oversight.