2101 Wilson Boulevard, Suite 610
Arlington, VA 22201
November 15, 2017
The Honorable Orrin Hatch The Honorable Ron Wyden
Chairman Ranking Member
Senate Finance Committee Senate Finance Committee
219 Dirksen Senate Office Building 219 Dirksen Senate Office Building
Washington DC 20511-6200 Washington DC 20510-6200
Dear Chairman Hatch and Ranking Member Wyden:
The Community Home Lenders Association (CHLA) writes to express our significant concerns about the Senate “Tax Cut & Jobs Act” and to suggest changes to the bill as the Committee considers this legislation.
CHLA is very supportive of the goals of the Senate tax bill of providing substantial tax relief for individual and corporate taxpayers, and simplifying and reforming the tax code. However, we have significant concerns that provisions in the bill could dramatically reduce homeownership tax incentives and thereby result in a reduced homeownership rate, a reduced demand for home purchase, and lower home prices.
Therefore, CHLA opposes the Senate tax bill unless substantive changes are made to address our concern
CHLA recommends the following changes to the Senate tax bill to address these concerns:
1. Create an option (only for taxpayers that use the standard deduction, to avoid double dipping) for a non-refundable tax credit of 15% for combined mortgage interest and property tax payments on primary and second home residences that, when combined with state and local income tax payments, exceed $13,000 for married couples ($6,500 for individuals).
2. Limit the capital gains exclusion to homes that were a taxpayer’s primary residence in 2 of the last 3 years – with limits to curtail the use of converted second homes or investment properties.
3. Amend or clarify pass through treatment of Subchapter S Corporations to ensure that independent mortgage bankers (IMBs) receive such tax treatment.
We note that CHLA’s tax credit proposal also targets tax relief to the same taxpayers that would experience a tax increase under the Senate tax bill, due to its elimination of deductions for both state and local income taxes and for property taxes.
We appreciate that there will be an incremental revenue loss from our proposed changes, but believe that homeownership tax incentives are so important for the housing market and the broader economy that it is necessary to make other revenue adjustments to enable these changes. Our proposal is targeted to those losing tax deductions, in order to limit the revenue loss.
With our proposed modifications, the Senate bill would still include substantial reductions and reforms of homeownership tax incentives. CHLA could support these changes – provided they are used to help pay for broad based individual and corporate tax relief, as the Senate bill does. These reforms include:
- Reducing the effective tax benefit of mortgage interest and property tax payments from as high as 39.6% of income under current tax code to no more than 15% of income. (CHLA proposed credit).
- As proposed in this letter, reducing the maximum tax benefits on mortgage interest to combined 1st and 2nd mortgages below the current $1 million cap.
- As proposed in this letter, capping the level of property taxes for which tax benefits are available.
- Reforming the capital gain exclusion for profits on sale of a principal residence – including: (1) Phasing out the exclusion for couples with AGI over $500,000 (and individuals over $250,000), (2) Tightening the principal residence requirement from 2 of the last 5 years to 2 of the last 3, and (3) Limiting multiple uses in a 5-year period for converted second homes and investment properties.
Concerns About H.R. 1 Impact on Homebuyers and Homeownership
Homeownership is a vital part of the economy, contributing roughly 15 percent of GDP. The importance of the housing market to the overall economy was vividly demonstrated by the 2008 housing collapse, which resulted in millions of Americans losing their home to foreclosure and was a key factor in a multi-trillion dollar bailout of our largest financial institutions and the worst recession since the Great Depression.
Over the last nine years, our economy and housing markets have steadily improved, with home prices rebounding. However, the national homeownership rate remains at the lowest level in 50 years.
CHLA appreciates the objectives of simplifying and reforming the tax code and reducing taxes on families and individuals by almost doubling standard deduction, to $24,000 for a married couple and $12,000 for an individual. Moreover, individual taxpayers will not be adversely affected by taking deductions through a standard deduction instead of the mortgage interest deduction, as a result of the higher standard deduction.
However, the use of the primary tax incentives for home purchase [the mortgage interest deduction (MID) and deduction for property taxes] would be virtually eliminated.
While press reports on the Senate tax bill have largely focused on how the Senate bill retains the higher $1 million mortgage cap, while the House reduces this to $500,000, this obscures the most significant impact in the bill on homeownership – the combined large increase in the standard deduction and elimination of state and local income tax and property tax deductibility. The indirect effect of these changes would likely be that fewer than 5% of homeowners will use the MID (and corresponding property tax deduction).
This is likely to have two detrimental impacts. First, the homeownership rate, already at a 50 year low, could drop further if the MID (and property tax deduction) effectively disappears for more than 90% of homeowners. While it is difficult to quantify the behavioral impact of the MID on home purchase decisions, there is no doubt that significant numbers of homebuyers either calculate or more generally factor in these tax benefits in their home buying decision. A resulting reduced homeownership rate will also have a detrimental impact on home construction and the economy more generally.
Secondly, economists generally agree that the MID and related tax benefits are to some extent embedded into home prices and that the withdrawal of these tax benefits would have a negative impact on home prices. For example, a May study by the accounting firm, PricewaterhouseCoopers, concluded that home prices nationally would drop 10% in the short term if the standard deduction were doubled and the state and local tax deduction eliminated. We witnessed the repercussions of a drop in home prices in 2008, when declining home prices triggered a wave of foreclosures, mortgage losses, and broader economic decline.
CHLA Recommendations – MID and Property Tax Payments
The Senate tax bill would: (1) significantly increase the standard deduction, (2) eliminate the mortgage interest deduction for second homes and home equity debt, and (3) eliminate the deduction for property tax payments.
CHLA wrote Congress in April to express concerns about the negative impact of these types of changes on the housing market and economy, and to suggest the creation of a mortgage credit to ameliorate this impact.
CHLA is writing now to provide more specifics on our recommendation for a mortgage credit for qualified mortgage interest and property taxes – as an option for taxpayers that elect to use the standard deduction. We propose a level of 15% – which equates to a deduction under the current tax code for the second lowest tax bracket. This would significantly curtail the tax benefit for higher income tax brackets relative to current law – and would equalize the tax benefit among homebuyers. We would propose to make it non-refundable, which is effectively how the current MID is.
CHLA is prepared to support a reduction in the current $1 million cap on mortgage eligible for tax benefits, if necessary for revenue purposes. We believe the $500,000 cap in the House bill, H.R. 1, is insufficient – a level that is even below the permissible GSE loan limit in higher cost areas of the country (currently $636,150). Our suggestion would be some multiple of this – e.g. 120 percent – which would equate to a cap of $795,188 for both a deduction and our proposed credit . And, it is critical to annually index this cap for inflation, as so much of the tax code does.
We also appreciate the effort in the House and Senate bills to limit the level of property tax benefits eligible for tax benefits. However, we believe even the $10,000 cap in H.R. 1 is too low. Our suggestion would be a cap of 3% of the high cost GSE loan limit – which would equate to $19,085 – again for both a deduction and our proposed credit.
Finally, we oppose eliminating tax benefits on either mortgage interest or property tax payments for second homes. This could have a significant negative home price impact in areas with higher concentrations of second homes. Interest and property tax benefits should apply to primary residences and second homes, with any mortgage or property taxes cap applying to the sum of both.
CHLA Recommendations – Capital Gains Exclusion for Principal Residence
The Senate tax bill would change current law, which permits exclusion of capital gain on a on a home for up to $500,000 for a married couple ($250,000 for an individual) – by (1) phasing out the home sale capital gain exclusion for families with AGI over $500,00, (2) increasing the number of years a homeowner must live in the home from two of the last five years to five of the last eight years, and (3) limiting the frequency of the exclusion from once every two years to once every five years.
CHLA appreciates the desire to limit this tax treatment, in particular to limit the rotating of second homes to primary home status in order to achieve multiple capital gain exclusions within a 5-year period. However, the reforms in the Senate tax bill are too stringent, e.g., it denies the capital gains exclusion for owning a home for 4 years and 11 months – even though by contrast, long term capital gains treatment for stocks only requires a 1-year hold.
CHLA believes a more balanced approach is optimal – and therefore we recommend:
- Changing the bill’s 5 out of the last 8 year principal residence requirement to 2 out of the last 3 years.
- Modifying the bill’s once in every 5-year limitation use to once every 3 years – except applying a once in every 5 year limitation if the taxpayer is trying to take two exclusions in a 5-year period and one of those was held as a second residence or investment property during part of that 5-year period.
- Retaining the $500,000/$250,000 AGI phase-outs as proposed in the bill.
Combined, CHLA believes these changes would reform the tax treatment to address what some would characterize as abuses – while providing fair treatment for homeowners.
Pass Through Treatment for Independent Mortgage Bankers (IMBs)
CHLA appreciates that the Senate tax bill would reduce the corporate tax rate. However, many of our members are Subchapter S Corporations, and therefore are keenly interested in the bill’s pass through treatment for such firms. The Senate tax bill excludes pass through tax treatment for certain “personal services” corporations, such as attorneys, accountants, and consultants. However, it is not clear whether IMBs would receive such treatment.
More favorable pass through treatment seems designed to provide tax incentives for firms that create jobs and for firms that engage in manufacturing or provide tangible products, as opposed to providing professional services. On both of these criteria, IMBs clearly fall into the first category, as opposed to the latter one.
IMBs provide an important tangible product – the underwriting of mortgages and their follow-up servicing. And, IMBs are labor-intensive, creating a significant number of jobs for loan originators, underwriters, servicing staff, and back office staff.
Therefore, CHLA would also request that the Senate tax bill be amended or clarified to ensure that pass through tax treatment is afforded to independent mortgage bankers (IMBs).
In closing, CHLA supports both individual and corporate tax relief and reforms of existing tax incentives for homeownership – but believes that targeted modifications are needed to the bill in order to preserve essential homeownership tax incentives that are critical to our nation’s housing markets and economy.
We appreciate your consideration of this letter and these suggestions.
COMMUNITY HOME LENDERS ASSOCIATION
CC: Hon. Mitch McConnell
Hon. Chuck Schumer
Treasury Secretary Steven Mnuchin