Federal Tax Reform and Tax Incentives for Homeownership

On January 7, 2005, President Bush announced the establishment of a bipartisan panel to advise him on options to reform the tax code. In the Executive Order establishing the Panel, the President instructed the Panel to recommend options that would make the tax code simpler, fairer, and more conducive to economic growth, while recognizing the importance of homeownership and charity in American society.

The Tax Reform Panel issued its final report to the Treasury Secretary on November 1, 2005. In its report, the Panel recommended two tax reform plans, the Simplified Income Tax Plan and the Growth and Investment Tax Plan. Under both proposals, the Panel suggested converting the current mortgage interest deduction to a Home Credit equal to 15 percent of mortgage interest paid up to a cap, which the Panel recommended lowering to a limit based on average area home prices as determined by the Federal Housing Administration (FHA). The Panel also recommended eliminating the deduction for interest on mortgages on second homes and interest on home equity loans as well as the deduction for state and local property taxes.

Currently, taxpayers who itemize may deduct interest paid on mortgage debt used to acquire a first or second home up to $1 million. The interest on an additional $100,000 of debt secured by home equity is also deductible.

Provisions of the tax code allowing for the deduction of mortgage interest and state and local property taxes are consistent with America's longstanding tradition of encouraging homeownership and have been powerful incentives for the expansion and preservation thereof.

Converting the current mortgage interest deduction to a cap could adversely affect real estate prices, and would disproportionately affect high cost areas, where the median home price is often much higher than the FHA loan limit.

Preservation of the mortgage interest deduction continues to be a MBA advocacy priority.