A CASE FOR HOMEOWNERSHip: Why california REALTORS OPPOSE CONGRESSIONAL TAX REFORM PROPOSAL 11.29.17
C.A.R. is NOT opposed to tax reform, but C.A.R. is opposed to H.R. 1. C.A.R. opposes any reform that eliminates or weakens housing incentives, or increases taxes on California homeowners. This tax reform bill does all of that, which is why C.A.R. OPPOSES H.R. 1. Homeownership is not a tax loophole! Homeownership has proven to be the best way for the average family to build wealth, financial security in retirement, climb the economic ladder and grow the middle class. It s no secret why the typical homeowner has nearly 50 times the net worth of the typical renter. $300,000 Real Median Net Worth by Housing $250,000 $231,400 $200,000 $150,000 $100,000 $50,000 $- $5,000 1989 1992 1995 1998 2001 2004 2007 2010 2013 2016 Owner Renter
REALTORS cannot sit idly by while other industries and corporations fight for lower taxes at the expense of real estate. REALTORS cannot sit idly by while other industries and corporations fight for lower taxes at the expense of real estate. Every industry is lobbying Congress to lower their taxes. They are fighting to keep as many tax benefits as they can for their companies and their industries. But who is lobbying for the individual homeowner? H.R. 1 has nothing for homeowners; it only weakens existing housing incentives and benefits! Congress has incentivized homeownership with the tax code for more than 100 years; however, H.R. 1 rolls back these incentives and benefits. How does H.R. 1 do this? Cuts the mortgage interest deduction (MID) cap in half from $1 million to $500,000. More than 1 in every 4 mortgages (27%) originated in California last year were above that cap. These are not mansions, these are casualties of an unaffordable housing market. Eliminates the MID for second homes, affecting nearly 300,000 Californians. Eliminates the MID for home equity loans. Nearly half of California s owner-occupied housing stock uses this source of financing, which overwhelmingly goes back into their home or into other big-ticket items like education. 1 Extends the qualification period for capital gains exclusion from 2 years to 5 years for primary residences, affecting roughly 15% of CA homes. Tens of thousands of California homes sold between 2 and 5 years of ownership. Caps the property tax deduction at $10,000, meaning that nearly 17% of home sales will lose some portion of their current property tax deduction. Eliminates moving expense exclusion. Eliminates the tax exemption on private activity bonds, which is the source of funding for many nonprofit and affordable housing construction projects. Eliminates the final two years of the New Markets Tax Credit. Eliminates personal casualty loss deduction. 1 http://consumerbankers.com/sites/default/files/novantas_heloc_2015_consumer_survey_report_web.pdf
In addition to the changes proposed above, H.R. 1 stealthily eliminates the tax incentive the remaining MID deduction plays for renters to become homeowners. By doubling the standard deduction, only the top 5 to 10 percent of tax filers will itemize and claim the MID. C.A.R. is not opposed to the doubling of the standard deduction, but Congress must provide some incentive for renters to become homeowners as they have always done. What did residential real estate gain in H.R.1? NOTHING! Congress wants to pass a tax bill that provides no new benefit for homeowners; only takes benefits away from them. H.R. 1 looks at homeowners and the housing market as nothing more than a piggy bank. What does the House bill do? H.R. 1 will make many other whole sale changes to the U.S. tax code, some groups and individuals will benefit, others will not. Individual tax code changes: Eliminates state and local income tax deduction, impacting more than 5 million Californians 42% of which earn under $100K/year. Repeals the Alternative Minimum Tax. Nearly doubles the standard deduction. Eliminates the personal exemption. Doubles the tax exemption limit for the estate tax and eventually eliminates the estate tax altogether. Increases the child tax credit. Reduces the 7 current tax brackets to four. Medical expense deduction eliminated. Electric vehicle credit eliminated.
Business tax code changes: Maintains the 1031 exchange for real estate. Decreases the corporate tax rate to 20% from 35%. Retains the carried interest on assets held for three years. Allows for the immediate 100% expensing until 2023. Limits business interest deductions to 30% of adjusted income. Repatriation rate of 14% for cash, 7% for other assets. Eliminates the employer-provided child care credit. Eliminates disabled access credit. Maintains state and local tax deductions on rental properties. What about the Senate bill? The Senate bill, like the House bill, will hurt California s real estate market. Many of the changes proposed by the Senate on individuals have expiration dates of 2025. This is an accounting mechanism that allows the Senate to pass the tax reform bill without threat of a filibuster, but doesn t change the burden on homeownership. The changes proposed by the Senate bill include:
Real estate tax changes: Extends the qualification period for capital gains exclusion from 2 years to 5 years for primary residences, which will depress our already-tight housing supply even further. Roughly 15% of existing home sellers would suffer a tax penalty if they sell. Will they sell, or will those homes be kept off the market? Eliminates MID for home equity loans. Eliminates ALL state and local tax deductions, including property and income tax deductions. Eliminates the tax exemption on private activity bonds. Allows personal casualty loss deduction for presidentially declared disasters. Limits moving expense deduction to members of the Armed Forces. Individual tax code changes: Eliminates the AMT. Doubles the estate tax exemption. Nearly doubles the standard deduction. Increases the child tax credit. Business tax code changes: Reduces tax rates to 20%. Retains carried interest for assets held for 3 years. Allows for immediate 100% expensing before 2023. Limits business interest deductible to 30 percent of adjusted income. 10% repatriation rate for cash profits, 5% for other assets. Maintains 1031 exchanges for real estate. Maintains state and local tax deductions for rental properties. Because of California s high property and income taxes, the Senate bill will hit California harder than almost any other state. Why is C.A.R. opposed to the elimination of state and local tax deduction? California is a high-cost state. The numbers show the loss of this deduction will have the largest impact on homeowners who already pay the majority of taxes. Some estimates place as much as 2 80 to 90 percent of the income tax burden on homeowners. State and local tax deductions have been a part of the tax code since the inception of the current federal income tax system. The law has recognized that taxing money paid to the states and local governments was a form of double taxation and a penalty on taxpayers. 2 https://www.forbes.com/sites/lawrenceyun/2017/10/12/tax-reform-impact-on-homeowners/
Additionally, California is what is known as a donor state. That means for every dollar we send to the federal government they send back less than a dollar ranking 43 out of 50 in Federal Government support. In other words, California is subsidizing other states federal programs and funding. If the state and local tax deduction is eliminated Californians will get even less of their money back from the federal government. Why is C.A.R. opposed to extending the capital gains exclusion holding period from 2 years to 5 years? Requiring residents to stay in their home for at least 5 years, as opposed to the current 2 years, to benefit from the capital gains exclusion incentivizes people not to sell their home as quickly as they otherwise would. This will have the effect of locking up inventory, which is already running less than half of normal and driving the cost of homeownership out of reach for much of California s middle class. Additionally, the House provision would be applicable to sales and exchanges starting January 1, 2018. So even if your clients are in contract now, if they do not close prior to January 1, 2018 they will have to have been in the home for 5 of the last 8 years to qualify for the capital gains exclusion. This will change the rules after the fact for contracts entered into in good faith. The Senate provision applies to sales and exchanges starting January 1, 2018, but has language that allows for an exception if there is a binding contract before January 1, 2018. Why is C.A.R. opposed to eliminating the MID for home equity loans? Home equity loans are an affordable financing tool that is often used by homeowners to pay for home improvements. Often times these home improvements increase the tax basis of a property, such as renovating a kitchen, remodeling a bathroom, or making a home more energy efficient. This source of funds is used widely by households across the state, even in areas with more affordable home prices.
Home equity loans can also be used to pay for emergency medical bills, student debt or other large expenses that can otherwise drain a family s life savings. This flexibility deserves to be preserved. Won t the Senate fix the problems with H.R. 1, or won t it get worked out in conference? Every provision passed in H.R. 1 will now be considered in conference with whatever passes the Senate. The idea that a bill will be fixed is far from a sure thing. Even more troubling are the areas where both the Senate and House bills are aligned. Conferees will have difficulty compromising on provisions that they don t agree on, it will be nearly impossible to change provisions that are in both bills. Including the: Elimination of the state and local income tax deduction. Elimination or reduction of state and local property tax deduction. Extends the qualification for capital gains exclusion from 2 years to 5 years for primary residences. Elimination of MID for home equity loans. Eliminates the tax exemption on private activity bonds. Both bills eliminate the MID as an incentive for renters to become homeowners. By nearly doubling the standard deduction only the top 5 to 10 percent of tax filers will itemize and claim the MID. what now? House of Representatives The House has passed H.R. 1 and now waits for action by the Senate. Senate The Senate Finance committee has voted their bill out and sent it to the floor for a vote by the full Senate. Senate and committee leadership are now working on changes to the bill that will garner the 50 votes needed to pass it (assuming the Vice President acts as a tie breaker).
Conference If the Senate passes a bill, the two bills will go to conference where the differences will be worked out. The bill that comes out of conference will then have to be voted on again in both the House and the Senate. This ensures the Senate and House have approved the same bill to send to the President s desk for signing. What is next for C.A.R.? C.A.R. will oppose the Senate bill and hopes Senators Feinstein and Harris vote no on the bill. If the bill that comes out of conference still eliminates and/or weakens real estate tax incentive, or increases taxes on California homeowners, C.A.R. will continue to oppose the bill. What can you do? Contact your member of Congress and urge them not to support the legislation.