... and so it starts in earnest ...
Mid-America's homeowners subsidize housing of wealthy
By SCOTT BURNS
Universal Press Syndicate
Sept. 6, 2004, 10:30PM
chron.com
Here's a reader letter that could start a new Civil War, only this time it would be Mid-America against the East and West coasts. It could also be real class warfare: the middle class against the upper middle class and deeply affluent.
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L.M. from Houston asks, "Is it fair that the average homeowner in 'flyover country' receives no benefits from home mortgage interest and property taxes while our wealthy neighbors in River Oaks and those who live on the two coasts can write thousands of dollars off their taxes each year?
"To my way of thinking, I am subsidizing wealthy homeowners in Texas and folks in places like L.A., San Francisco and Boston. Every dollar they write off their federal income tax has to be replaced, and homeowners like me are paying for it.
"I receive no tax benefit. I live in a standard 2,000-square-foot tract house that's perfectly nice, but because the home prices in Houston aren't outrageous and the personal property taxes are (so far) relatively reasonable, we fall way below the standard deduction.
"I want to see this unfair subsidy ended. I think if other homeowners in 'flyover country' were aware of this subsidy they are paying for, they would be as outraged as I am."
Tax break or subsidy?
L.M. has touched on our most treasured tax deductions. They are sure to be defended by real estate agents who love to sell the tax breaks, even when they don't work. They will be deemed life support by debt-beleaguered homeowners in the high-cost/high-tax urban areas on the coasts.
In fact, L.M. is right on. The deductions for home mortgage interest and real estate taxes are subsidies to those with more income from middle American, middle-income families, those referred to by the term "flyover country." They are also subsidies from low-cost housing areas to high-cost housing areas.
Here's the math. The standard deduction on a joint return for 2004 is $9,700. Only itemized deductions greater than that amount count for reducing your income tax bill. While we talk a great deal about tax deductions, millions of households don't itemize. Most households have only four items to deduct: mortgage interest, real estate taxes, charitable contributions and state income taxes.
The first two items loom large in most itemized returns. According to one set of estimates, for instance, the "tax expenditures," tax revenue forgone because of deductions, for mortgage interest and real estate taxes were $87.9 billion in 2002. The tax expenditures for charitable deductions and other state and local taxes were $30 billion and $44.9 billion, respectively.
Median won't cut it
Right now, if you buy the median-priced home in dozens of mid-American cities, your tax deductions from ownership won't exceed the standard deduction. Ownership deductions will cut your tax bill only if your other deductions take you up to the $9,700 standard deduction, which is $4,850 for singles and $7,150 for heads of household.
If you buy a $140,000 house with 20 percent down, for instance, you'll enjoy no tax benefits. Only when you get to around $170,000 do tax benefits appear.
This means there are virtually no tax benefits to homeownership if you buy the median-priced home in
Atlanta ($156,800); Des Moines, Iowa ($141,800); Dallas ($141,000); Grand Rapids, Mich. ($134,500); St. Louis ($128,800); Indianapolis ($125,900); Pittsburgh ($116,300); Tulsa, Okla. ($113,300); or Peoria, Ill. ($98,400) — not to mention dozens of other mid-American cities tracked by the National Association of Realtors where the median home is priced below $170,000.
At the high end of the home price scale, the tax benefits are substantial. In Los Angeles, where the median home price is $438,400, a homeowner in the 25 percent tax bracket would enjoy tax benefits for about 19 years. The benefits would amount to nearly 10 percent of the home's original purchase price. In fact, the actual benefit would be higher because most buyers would be in a higher federal tax bracket.
They would also have the state income tax to increase the value of their ownership deductions.
Mid-America lagging
Now, can you guess where the big tax-free home appreciation is?
It's not in Nebraska, Ohio, Iowa, Indiana, Illinois, Kansas or Missouri. It's certainly not in Texas.
The Office of Federal Housing Enterprise Oversight maintains price indexes for different areas in the country. While the broad U.S. index appreciated 41.7 percent in the five years that ended March 31, houses in the Pacific states rose 62.6 percent, houses in the New England states rose 67.8 percent, and houses in the Middle Atlantic states rose 51.4 percent.
In mid-America, however, appreciation was well below average, ranging from 20 to 30 percent over the last five years.
Does this mean the tax subsidy for expensive housing is causing coastal prices to rise? I doubt it. Other factors are at work.
What it does mean is that a good idea, encouraging homeownership with tax deductions, is no longer working. Instead, homeownership deductions have become the two-martini lunch of the upper middle class.
Send questions about personal finance and investments to: SCOTT BURNS, P.O. Box 655237, Dallas 75265; e-mail can be sent to scott@scott burns.com. Burns' Web page is www.scottburns.com. |
