Paying People To Buy Houses
Readers suggested a topic on the “fiscal cliff” and tax changes. “Which of the three doors will be chosen to resolve the fiscal cliff crisis? 1. Full sequestration? 2. Compromise solution? 3. Postpone the resolution deadline? Isn’t it natural for the Republicans to use the mortgage interest deduction (MID) as a cudgel in the fiscal cliff debate, since it is primarily Democrat-leaning states that have the highest average mortgage interest deductions?”
A reply, “Crazy idea. The MID is a political third rail. HOWEVER, what if there was a different idea related to housing tax breaks? 1. Lose the $500,000 capital gain tax exclusion; however, 2. Index the purchase price of the home (the initial basis) to inflation.”
“OR: 1. Lose the MID; however, 2. Index the purchase price of the home (the initial basis) to inflation. I think losing the MID is political hot lava, but getting rid of the capital gain exclusion might be doable, since it’s a controllable and event you can plan.”
“Like a 1031 exchange; you don’t pay gains on the portion that is traded into another property. The capital gain exclusion always bothered me and is ripe for abuse. A left leaning relative owns a bunch of rental homes…his plan (before they changed the rules to limit this abuse) was to live in each of his rentals for 2 years before selling to avoid the capital gain tax. I note that they’re left leaning just to note that avoidance of tax using the current code is not limited to the crazy Republicans in the room. It is pretty much everyone.”
“Again…we need massive tax reform to take these kinds of loopholes out of existence.”
And finally, “Can you imagine how insane it would be if a capital gains tax was only applied to the actual *real* (inflation adjusted) capital gain and *not* the inflated portion??? People that is almost hard money! Next thing you know you’ll have a gold backed currency! It’s absolute heresy!”
From National Public Radio. “The federal government has all these ways of paying people to buy houses without actually, you know, paying people to buy houses. We’ve talked a lot about two examples of this: 1. The mortgage-interest tax deduction is effectively a government payment to people who are paying a mortgage. 2. Fannie Mae and Freddie Mac allow home buyers to get below-market-rate mortgages. They blew up in the housing bust, requiring a massive federal bailout.”
“We haven’t talked so much about a third example of a federal housing subsidy that doesn’t seem like a subsidy: the Federal Housing Administration, aka FHA. Like Fannie and Freddie before the housing crisis, FHA has always funded itself. And, like Fannie and Freddie after the crisis, FHA may soon need a taxpayer bailout. An audit of FHA released today found that the agency is $16 billion in the hole.”
“The FHA doesn’t actually make loans. It guarantees them. The trouble is likely to come from loans made in 2008 and 2009. At that time, it became increasingly difficult to get a private loan. So more and more borrowers turned to FHA-backed loans, and the agency wound up backing hundreds of billions of dollars in mortgages. On top of that, FHA loans require only a tiny down payment — as little as 3.5 percent. As a result, when housing prices decline, borrowers very quickly end up owing more than their home is worth. This dramatically raises the risk of default.”
“FHA will probably need taxpayer money to make good on the promises it made as the housing market was collapsing.”
The New York Times Times. “More than one in six F.H.A. loans are delinquent 30 days or more, according to Edward Pinto, who specializes in housing. Delinquencies increased by 166,000 from June 30, 2011, to September 2012, he said, a 12 percent increase. Loans insured by the F.H.A. often allow very small down payments of 3.5 percent of the purchase price. ‘There’s a fundamental problem with the F.H.A.,’ Mr. Pinto said. ‘Its loans are too risky and that has to be addressed. It’s not the legacy book that’s creating all the problems. It’s beyond that.’”
“The F.H.A. is subject to a statutory capital requirement of 2 percent of loans, or about $22 billion on its $1.1 trillion portfolio. An economic value of negative $5 billion to $10 billion would leave the F.H.A. $27 billion to $32 billion short of this statutory requirement, Mr. Pinto said. This would be the fourth consecutive year that F.H.A. has failed to meet the requirement, he added.”
Mortgage News Daily. “At first glance, few in the real estate or lending industry want the government to do away with the mortgage interest tax deduction. But as noted in this commentary a few months ago, the deduction a) is rare in other countries, b) has a much larger perceived benefit than actual benefit. Besides, they’ll probably go from $1 million down to $500k, making it politically acceptable.”
“Lastly, ‘The Mortgage Interest Deduction is of limited value because of low rates and low house prices. A $300,000 house with a 30-year mortgage at 3.25% pays just $7,800 in mortgage interest, yet the 2012 standard deduction is $11,900 if married filing jointly. If the MID is nixed, placing your house into a corporation and having the corporation rent the home to you, allows you to continue deducting all mortgage interest.’ wrote economist Elliot F. Eisenberg.”
The Washington Post. “Tax experts say that under the Simpson-Bowles version of fiscal reform, virtually all real estate write-offs, including the capital-gains exclusion, would disappear in a vastly simplified federal tax code. Others on the list: deductions for local and state property taxes; federal tax exemption for interest on state government bond issues used to help provide mortgages for moderate-income home purchasers; and exemption from income taxation of mortgage amounts forgiven by lenders in loan modifications and short sales.”
“The exclusion of home sale profits, which is projected to save homeowners $86 billion between 2010 and 2014, according to congressional tax estimates, allows taxpayers who have owned and used their principal residences for two of the five years preceding a sale to escape capital-gains taxation on as much as the first $250,000 (for single filers) and $500,000 (married joint filers) of the profits they make from the transactions.”
“Bottom line here: Almost no one opposes the concept of reducing the federal deficit. But how this is achieved — who gets hurt, who benefits — will be key. If you own a home, keep your eye on the tax deduction ball. The largest single tax-free benefit most owners will ever receive from the federal government could be in play.”
