WASHINGTON — The 75-year-old mortgage-interest deduction for taxpayers could be slightly fractured, but not altogether shattered, if Congress takes the tax reform stand advocated now by the Joint Committee on Taxation.
It's possible that the House Ways and Means Committee might vote to limit the deduction for non-business interest expense to whatever is greater: interest on debt secured by the taxpayer's principal residence or $20,000. And interest expense equal to net investment income would also be deductible. This may sound rough to some upper-bracket homeowners.
President Reagan's original tax proposal to Congress limited the interest deduction to $5,000, plus interest on debt secured by the taxpayer's mortgage interest plus net investment income.
Current law permits unlimited deduction for mortgage interest as well as other consumer interest.
Oppose Deduction Limit
Washington housing finance expert Burton C. Wood of the Mortgage Bankers Assn., pointed out recently that the MBA in maintaining its longstanding policy against any restrictions or limitations on deductibility of home mortgage interest. Wood said this deduction is used by most middle-income taxpayers--those with incomes in the $30,000 to $50,000 range.
Obviously, this deduction is also politically popular because it affects so many taxpayers who also vote. For instance, President Reagan has insisted that interest deduction for principal-residence mortgages remain sacrosanct.
Wood noted that the alternate proposal of the House Ways and Means Committee could be the "first crack in the facade of the untouchable mortgage-interest deduction." He added that the combination of a higher standard deduction and higher personal exemptions could erode broad support for the inviolability of mortgage-interest deductions. An alternate proposal would phase in a $6,000-joint-standard deduction by 1987, with an increase of $500 for each dependent.
If the amount ($6,000 plus) would exceed a household's itemized deductions, the mortgage-interest deduction would be less than the standard deduction. Wood suggested that this would decrease itemizing by taxpayers and reduce the importance of a mortgage-interest deduction.
No Other Interest
In addition, Wood said that the purchaser of a $212,500 house--not unusual in Southern California--would have a first-year interest payment of $20,366.80 on a 30-year, 12% mortgage after a down payment of $42,500. Because that is more than $20,000, the taxpayer's expense deduction would be limited to the interest expense on the home mortgage.
Other credit interest, such as that on an automobile or furniture, would not be allowed. Also, according to Wood, the home mortgage interest expense would, for the first time, be used as the standard for determining the amount of interest a taxpayer would be allowed to deduct on a tax return.
Whether this tax action, if taken, would be good or bad in terms of tax cost to most Americans can be argued.
Refor Will Hurt
Veteran Washington realtor Charles Purcell takes the tack that any worthwhile tax reform is going to hurt, and that all affluent Americans should gird themselves to pay the piper. "I just hope that the moderate-income person or family that owns a house, or is ready to buy one, will not be disadvantaged," he said.
"Frankly, I cannot work up many tears for the taxpayer getting into a house costing more than $150,000, but I can still empathize with the young couple trying to stay solvent while raising a family and trying to buy a modest home."
SHORTLY: Congressional passage and the President's signing of the imputed-interest bill gives a break to homeowners who decide to offer below-market interest to sell their homes in times of high interest rates. A 9% rate was approved for financing of less than $2.8 million. The National Assn. of Realtors credited California Reps. Robert T. Matsui (D-Sacramento) and William M. Thomas (R-Bakersfield) for their work on this issue.
As of November 1, minimum FHA/HUD property standards were out, and state and local building codes are the rules for home builders, but the Department of Housing and Urban Affairs must approve the state and local codes to be used.