Realtors® Raise Alarms Over Real Estate Tax Proposal

SAN FRANCISCO (October 31, 2005) – As President Bush’s advisory Tax Reform Panel completes its work, the board of directors of the National Association of Realtors® (NAR) today formally voted to oppose proposals under consideration by the panel that NAR believes would drive down real estate values, have a devastating effect on the nation’s housing economy and negatively impact the nation’s economy.

The value of the nation’s residential property could decline 15 percent or more if President Bush’s tax reform panel’s expected recommendation to convert the mortgage interest deduction (MID) to a tax credit takes effect, according to preliminary projections by NAR’s Economic Research Division. The housing sector accounts for about 15 percent of the nation’s Gross Domestic Product.

Eliminating the tax deduction for second homes, another proposal under consideration, would impact at least 5 percent of the GDP. Second homes accounted for 36 percent of all home sales last year.

The panel, which is expected to make its final report to the president tomorrow, is considering recommending that Congress convert the MID from a deduction to a tax credit; is also considering reducing the $1 million cap on mortgages to the local FHA loan limit (which can be as little as $170,000 and no more than $312,000 in high cost areas such as Alaska, Hawaii, Guam or the Virgin Islands); repealing the deduction for property taxes, as well as other state and local taxes; and raising the amount of gain to be excluded on sale of a principal residence but reducing the frequency in which the exclusion can be taken.

“Before these ill-considered proposals become official, we are raising the loudest possible alarms over their prospective economic impact. Housing, which has sustained the economy for the past five years, represents 15 percent of GDP,” said NAR President Tom Stevens of Vienna, Va., who took office today.

“We are concerned not just for the housing economy but for the nation’s economy as a whole. Not only do the recommendations being considered by the panel have the potential to impact the value of every home, whether it has a mortgage or not, but also they will drive down real estate values. Consumers’ nest eggs will be jeopardized because much of investment for retirement is tied to the equity consumers have in their home,” he said.

Stevens said the Tax Reform Act of 1986 demonstrated that when the tax benefits associated with real estate ownership are curtailed, the value of real estate declines. The resulting loss of value in the commercial real estate sector was 30 percent following passage of that legislation.

‘We urge the president not to accept these proposals. They are bad for homeownership, bad for real estate and bad for the American economy. NAR will vehemently oppose them should they be considered by Congress,” Stevens said.

NAR’s board today funded new research to determine the economic effect of the panel’s recommendations, especially their impact on the value of residential and commercial real estate, and assess their impact on homeownership.

The NAR urges that real estate be recognized as a long-term investment, so the tax system should reflect the stream of income and expenses associated with long-term investments. Deductions for the amount of the purchase price and the loss of interest deductions are ill-advised for real estate investments. NAR also urges that the president and Congress preserve the deduction for state and local taxes, including property taxes.

A workable tax system should treat home ownership as investment not consumption; encourage savings a and tax-based incentives for home purchases; eliminate penalties for using savings for home purchases; and treat services associated with the purchase of real estate as part of the investment cost of the transaction, and not tax those services.

In other action, the board recommended that the federal government not establish criteria for the use of eminent domain by state and local governments. Each state should establish its own rules and laws governing eminent domain without interference from the federal government.

The board met on the final day of the 2005 REALTORS® Conference & Expo, Oct. 28-31, that drew more than 26,000 Realtors and guests.

The National Association of Realtors®, “The Voice for Real Estate,” is America’s largest trade association, representing more than 1.2 million members involved in all aspects of the residential and commercial real estate industries.

Source: NAR

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