Limit on Mortgage Tax Breaks Worries Some : But First Housing Bill in Six Years Provides for Permanent FHA Loan Insurance Program
Real estate experts are pleased with last week’s signing of the first major housing bill in six years, but worried that a new law that will limit tax deductions for mortgages greater than $1 million could be altered in future years to affect homeowners with smaller loans.
The housing bill, pushed by U. S. Sen. Alan Cranston (D-Calif.), makes permanent the Federal Housing Administration’s loan insurance program, which has helped more than 20 million Americans buy a home. It also raises the maximum loan amount under the FHA program to $101,250, a move that is expected to boost the program’s popularity in California.
The complex new rule that limits deductions for mortgage debt is part of another bill President Reagan signed that will raise $9 billion this fiscal year and reduce the nation’s record budget deficit.
Shut Down Several Times
The new housing bill “underscores the importance of the Federal Housing Adminstration loan program to low- and moderate-income buyers,” said Nestor R. Weigand Jr., a broker and 1988 president of the National Assn. of Realtors.
The FHA has been shut down several times over the past two years because Congress has frequently failed to extend the agency’s authority to continue operating.
The closures wreaked havoc on thousands of home buyers and sellers, whose transactions were threatened and sometimes canceled because of the shutdowns.
Making the FHA loan program permanent should prevent future closures, said Joel Singer, chief economist for the California Assn. of Realtors.
Buy from Government
Other provisions in the housing bill will allow tenants in public-housing projects to manage the buildings in which they live, and give them the opportunity to buy the projects from the government.
The bill will also encourage home ownership in “distressed” areas by providing grants of up to $15,000 to low- and moderate-income families who want to buy new or rehabilitated homes in their neighborhood.
Real estate experts aren’t sure how the new, $1-million cap on mortgage indebtedness will work; the Internal Revenue Service will issue final regulations on how the limit will be applied next year.
Economist Singer believes the new rule will allow all interest payments on amounts up to $1 million in combined debt for a first and second home to be fully deductible. Presumably, no deductions will be allowed for interest payments on principal amounts above $1 million.
As an example, Singer said, a future buyer with an outstanding mortgage of $2 million will probably be able to deduct only 50% of his interest payments.
Although the new limit will affect only affluent buyers, real estate experts fear the cap could be lowered in future years as Congress continues its efforts to reduce the budget deficit.
“We’re concerned that the $1-million ceiling might be lowered in the future, and that would affect a lot more people,” Singer said.
More Drastic Limit
Earlier, one elected official had suggested that deductions for interest payments be limited to just $15,000 a year--a ceiling that would prevent many buyers in California and other states with high home prices from writing off all their interest payments.
Singer also said the $1-million cap might limit future increases in the value of extremely expensive homes because buyers of those properties might not be able to write off all their interest expense. But some realtors who work in expensive housing markets disagreed.
“I don’t really think the limit will have much effect on Beverly Hills and other high-priced markets” because people who buy multimillion-dollar homes usually do it with money they can use at their own discretion, said Lou Piatt, executive vice president of Beverly Hills-based Jon Douglas Co.
Added Elaine Young, co-owner of Alvarez, Hyland & Young in Beverly Hills: “There might be some short-term hesitancy to buy (multimillion-dollar) homes, but I don’t think the new law will have any long-term impact. People will get used to it.”
More Borrowing Power
The $1-million cap, plus other real estate provisions in the defict reduction bill, are retroactive to Oct. 14.
Homeowners whose property has appreciated greatly over the last several years will be helped by another provision that changes the tax rules concerning home-equity loans. But the changes may curb the borrowing power of newer homeowners who made large down payments.
The provision allows homeowners to borrow up to $100,000 based on their equity and still write off all their interest payments. Under the old rules, deductions for such finance charges were generally limited to the purchase price of the home plus the cost of any improvements.
The new rule will allow homeowners who bought their homes several years ago to borrow more money through a home-equity loan and still deduct all their interest payments.
Limited by Ceiling
Under the old rule, a couple who bought their house for $30,000 20 years ago could only write off up to $30,000 in interest payments on a home-equity loan; now, they could borrow up to $100,000 and still write off all finance charges.
However, the new rule will hurt homeowners who could have borrowed more than $100,000 under the old rule and still write off all their interest charges because now those deductions will be limited by the new ceiling.
Owners of rental property emerged from the deficit-reduction package unscathed.
Real estate groups were successful in their efforts to kill a provision that would have ended the deferral of tax liability on gains from so-called “like-kind exchanges.” In a like-kind exchange, an investor can swap his property for someone else’s and defer paying taxes on any gain as long as the purpose for investing remains the same.
In addition, the new bill effectively eliminates a complex set of rules concerning installment sales that had been imposed on investors through last year’s Tax Reform Act.
