Home Sweet Home

Anybody in the industries depending on a continued housing boom/bubble will tell you even a rumor about cutting home owner tax benefits might turn a slow slide into a crash.

Yet the members of the President’s Advisory Panel on Tax Reform are whispering among themselves about cuts just as the residential real estate market has begun its long awaited downward crumble. Since the panel is dominated by retired politicians who will never have to face the voters again and by tenured professors who have never had to face anything but a thesis committee, it is mildly safe for them to break the taboo. For the outside world in this tippy moment, it is anything but safe.

The Panel is peeking at the sacrosanct interest deduction on mortgages. Your computer doesn’t have enough zeroes to express the number of billions in tax revenues foregone thanks to home owner deductions. A person, well a very rich person, can deduct up to $1 million a year on the interest payments for his McMansion.

But the non-rich home owning public can deduct their interest, too, which makes it a very popular provision. Probably not even the proposal which dares to cut the maximum interest deduction in half, a cut which would adversely effect only multimillionaires, could get through. And if it did, would it shatter our shaky prosperity?

The interest deduction is being used in ways not foreseen in the days when home mortgages were simple devices. Now we have the interest-only mortgage where “home buyers” pay nothing on the principle. Are such people really buyers or are they renters?
If hundreds of thousands of spurious home owners are deducting what amounts to their rent on their tax forms, it makes changing these laws yet more difficult.

What about cutting the tax exemption on capital gains realized from selling a home? Imagine how that would sit with the millions nearing retirement with no major asset but their homes.

Quite a prosperity we’re in, dependent on a housing boom so fragile any ill-timed vibration may end it. One raised voice, one loud exhalation or threatening rumor and the rockslide may begin.

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