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Understanding
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Home
Loan Tax Breaks?
Glossary
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Home
Loan Tax Breaks?
Taken
from the Dallas Morning News (09/7/04)
Here's a reader letter
that could start a new civil war, only this time it would be
mid-America against the East and West coasts. It could also be
real class warfare – the middle class against the
upper-middle class and deeply affluent.
L.M. from Houston
asks, "Is it fair that the average homeowner in 'flyover
country' receives no benefits from home-mortgage interest and
property taxes while our wealthy neighbors in River Oaks and
those who live on the two coasts can write thousands of dollars
off their taxes each year?
"To my way of thinking, I
am subsidizing wealthy homeowners in Texas and in places like LA,
San Francisco and Boston. Every dollar they write off their
federal income tax has to be replaced, and homeowners like me are
paying for it.
"I receive no tax benefit [from
homeownership]. I live in a standard 2,000-square-foot tract
house that's perfectly nice, but because the home prices in
Houston aren't outrageous, and the personal property taxes are
(so far) relatively reasonable, we fall way below the standard
deduction.
"I want to see this unfair subsidy ended.
I think if other homeowners in 'flyover country' were aware of
this subsidy they are paying for, they would be as outraged as I
am."
Subsidizing the wealthy
L.M. is talking
about one of our most treasured tax deductions. It is sure to be
defended by real estate agents who love to sell the tax break,
even when it doesn't work.
It will be deemed life support by
debt-beleaguered homeowners in the high cost/high tax urban areas
on the coasts. And we're not even counting the millions who
somehow think it's worthwhile to spend $1 on interest to save 25
cents on taxes.
In fact, L.M. is right on. The deductions
for home-mortgage interest and real estate taxes are subsidies
from middle-income families to those with more income. They are
also subsidies from low-cost housing areas to high-cost housing
areas.
Here's the math. The standard deduction on a joint
return for 2004 is $9,700. Only itemized deductions greater than
that amount count for reducing your income tax bill. While we
talk a great deal about tax deductions, millions of households
don't itemize. Most households have only four items to deduct:
mortgage interest, real estate taxes, charitable contributions,
and state income taxes.
The first two items loom large in
most itemized returns. According to one set of estimates, for
instance, the "tax expenditures" (tax revenue foregone
because of deductions) for mortgage interest and real estate
taxes were $87.9 billion in 2002. The tax expenditures for
charitable deductions and other state and local taxes were $30
billion and $44.9 billion, respectively.
Right now, if
you buy the median-priced home in dozens of mid-American cities,
your tax deductions from ownership won't exceed the standard
deduction.
Ownership deductions will cut your tax bill
only if your other deductions take you up to the $9,700 standard
deduction (or $4,850 for single filers, $7,150 for head of
household).
If you buy a $140,000 house with a 20 percent
down payment, for instance, you'll enjoy no tax benefits. Only
when you get to around $170,000 do tax benefits start to appear.
What deduction?
This means there are virtually no tax
benefits if you buy the median-priced home in such cities as:
Atlanta
($156,800);
Kansas City
($152,100);
Des Moines,
Iowa ($141,800);
Dallas
($141,000);
Grand Rapids,
Mich. ($134,500);
Knoxville,
Tenn. ($131,400);
St. Louis
($128,800);
Indianapolis
($125,900);
Fargo, N.D.
($124,200);
Dayton, Ohio
($119,700);
Pittsburgh
($116,300);
Tulsa, Okla.
($113,300);
Peoria, Ill.
($98,400); or
South Bend,
Ind. ($93,800) – just some of the dozens of mid-American
cities tracked by the National Association of Realtors where the
median home is priced below $170,000.
At the high
end of the home price scale, the tax benefits are substantial. In
Los Angeles, where the median home price is $438,400, a homeowner
in the 25 percent tax bracket would enjoy tax benefits for about
19 years. The benefits would amount to nearly 10 percent of the
home's original purchase price. In fact, the actual benefit would
be higher because most buyers would be in a higher federal tax
bracket. They would also have the state income tax to increase
the value of their ownership deductions.
Now, can you guess
where the big tax-free home appreciation is?
It's not in
Nebraska. It's not in Ohio, Iowa, Indiana, Illinois, Kansas or
Missouri. It's certainly not in Texas. It's not anywhere in
mid-America.
The Office of Federal Housing Enterprise
Oversight maintains price indexes for different areas in the
country. While the broad U.S. index appreciated 41.7 percent in
the five years ending March 31, houses in the Pacific states rose
62.6 percent, houses in the New England states rose 67.8 percent,
and houses in the Mid-Atlantic states rose 51.4 percent.
In
mid-America, however, appreciation was well below average,
ranging from 20 percent to 30 percent over the last five years.
Does this mean the tax subsidy for expensive housing is
causing coastal prices to rise? I doubt it. Other factors are at
work.
What it does mean is that a good idea – to
encourage homeownership with tax deductions – is no longer
working. Instead, homeownership deductions have become the
two-martini lunch of the upper-middle class.
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