WASHINGTON -- Call it the third rail of the federal tax system: the politically untouchable cluster of special benefits and subsidies set aside exclusively for homeowners, including deductions for mortgage interest, local property taxes and capital gains exclusions on up to $500,000 in sale profits.
Is the Obama administration serious about beginning to clamp limits on at least some of these subsidies? The administration isn't commenting on anything beyond what was proposed in its first budget submitted on Feb. 26, but housing and banking trade groups are worried that the initial proposal to cut back on the ability of upper-income families to write off mortgage interest and other expenses is just the opening move in a longer-range effort to reform the federal tax code.
They also argue that since tax subsidies are now embedded in home prices in most segments of the market -- not just the upper end -- removing them even partially would cause housing values to drop across the spectrum.
What should homeowners make of all this? Is there a real possibility that Congress would take away tax breaks that millions of people have come to consider an essential part of the home buying equation? Here's a quick overview of the issue:
What did the Obama budget propose specifically on mortgage interest and property tax deductions? Starting in 2011, homeowning households with adjusted gross incomes of $250,000 and above could only take write-offs at a 28 percent marginal tax bracket rate. To illustrate, say you're in the 35 percent bracket and have $20,000 of mortgage interest, property tax and charitable deductions, all of which are targeted in the Obama proposal. This year you'd be able to write off 35 percent of the $20,000 -- $7,000. If you were capped at a 28 percent rate, you could only write off $5,600. Your tax bill would go up by $1,400.
Why cut these deductions? Very simply -- to raise tax revenues so the government can spend the money elsewhere, such as for health care. Mortgage interest and property tax write-offs cost the Treasury massive amounts annually. In a report last October, the bipartisan congressional Joint Committee on Taxation estimated that in 2009, the mortgage interest deduction alone would cost the government $89.4 billion in uncollected taxes. Between 2008 and 2012, according to the committee, the interest write-off in its current form will cost the Treasury $443.6 billion. Property tax deductions will cost another $112 billion over the same period.