CHRIS WILLE: Political Fog Hangs Over Tax Bills

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Nov. 30--Should some form of the Republican tax legislation on the fast-track agenda in Congress become law -- the House and Senate versions differ but both push radical changes in home real estate regulations -- the impact on the real estate and homebuilding industries will be dramatic.

But the debate presents conflicting viewpoints over several major proposed changes in the tax code embedded in both bills. On one extreme are alarmist fears that new limitations on the mortgage interest deduction will sink home prices and cripple the economy. On the other extreme is the idea that home prices will indeed decline but homeownership will increase. How either scenario happens appears to exist only in a fringe fog.

This is one political hot potato. The wild card here comes from other components of the two bills.

The powerful National Association of Realtors and the National Association of Home Builders have been firing the heaviest barrage against the lower cap on the mortgage interest income tax deduction -- with those positions supported locally.

Xena Vallone, 2017 president of the Realtor Association of Sarasota and Manatee and a broker/agency owner, told the Herald-Tribune that both the national and local Realtor associations hold the view that tax reform should embrace the idea that America still believes in the promise of homeownership.

"Unfortunately, some parts of the tax reform bills do not keep the homeowner in mind and actually eliminate some incentives for owning a home," she said, articulating RASM's position. "Additionally, current homeowners could lose substantial equity from the more than 10 percent drop in home values likely to result if the proposed bills move forward as written."

Michael Saunders, the founder and CEO of Michael Saunders & Co., and Drayton Saunders, her son and the firm's president, take a pragmatic view. "We know historically that at any major shift in the real estate cost equation, whether it be interest rates or tax changes, will have short-term impact on behavior," they told the Herald-Tribune in a joint statement. "Certainly the major shifts being discussed have everyone concerned about potential negative impact on the Florida housing market.

"That said, we certainly hope that the final piece of legislation protects the benefits of homeownership. Our region depends on a healthy and prosperous real estate market."

The House bill allows homeowners to only deduct mortgage interest payments on the first $500,000 of the loans. The Senate bill only drops $100,000 from the current $1.1 million cap, but the measure places tight restrictions on both the popular home equity loans and capital gains from home sales.

This could change as senators and representatives negotiate a compromise bill acceptable to both houses -- should that even occur.

Ricky Perron, vice president of one of Sarasota's luxury homebuilders, Nautilus Homes, deals with an upscale clientele. "I've never really looked at the mortgage interest or property tax deductions as an incentive to purchase property. I doubt any of our clients do either, though I have to say we are all certainly glad they are there and hope they remain."

In 2015, 39.6 million tax returns itemized interest deductions, Internal Revenue Service data shows; the mortgage interest deduction was claimed on 29.77 million of those returns. Interest deductions came mostly from households with incomes exceeding $75,000. But the most popular deduction by far comes from itemizing state and local taxes. Perron cites a possible positive factor in tax-code reform that hinges on the latter tax break.

"Places with state income tax like California and New York will be the hardest hit by the GOP change, and Sarasota may see some benefit from this in the form of people moving here," Perron said. "State income tax has always been a driver for people to establish primary residences in Florida as retirement or a large payout approaches."

Another factor in tax reform is the Republican plan to raise that "standard deduction," an alternative to itemizing. Current law allows a married couple to deduct $12,700 from their taxable income, but reform would raise that to $24,000. Fewer households would bother itemizing as the deductions would hold little if any benefit.

"By nearly doubling the standard deduction while eliminating most itemized deductions," the National Association of Realtors said in a statement, "the bill would destroy or at least cripple the incentive value of the mortgage interest deduction (MID) for the great majority of current and prospective homebuyers, and sap the incentive value of the property tax deduction for millions more."

Perhaps most damaging to Florida's residential real estate market is the complete elimination of the mortgage interest deduction on second and vacation homes. The Sunshine State is by far the nation's leader in the number of vacation homes, with around half a million -- more than double any other state, according to Census Bureau figures.

Since Sarasota and Manatee counties attract a large number of people buying second homes for vacation purposes, the elimination of the tax deduction makes that purchase less appealing, Vallone said.

The Saunderses are more emphatic. "If indeed the deduction for second and vacation homes is eliminated, it will definitely have a negative impact on the real estate market in our three counties," they said, including Charlotte in the mix. "We are a popular destination of choice for second home buyers from around the country and world."

Here's hoping a rush to judgment doesn't unleash terrible consequences on the residential construction and real estate industries as well as homeownership.

Chris Wille is the Herald-Tribune's real estate editor. He can be reached at >[email protected] and 361-4805.

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