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1 1 (September 23, 2022)

handle is hein.crs/goveiwz0001 and id is 1 raw text is: Congressional Research Service Informing the legislitive diebate since 1914 September 23, 2022 Homeownership: Tax Policy Options and Considerations This In Focus discusses three selected demand-side options and three selected supply-side options for potentially promoting homeownership. Pursuing any of the presented options would require careful consideration about the specific design of each. This In Focus does not address the economics or desirability of promoting homeownership. For more on that topic, see CRS In Focus IF11305, Why Subsidize Homeownership? A Review of the Rationales, by Mark P. Keightley. In order to increase the homeownership rate, tax incentives must help households on the verge of homeownership overcome the barriers they face-mainly the down payment requirement and, in hot housing markets, high home prices (relative to income). Demand-side policies may address both barriers if properly structured, but may also benefit those who would become owners regardless, or sellers that respond by raising prices. Supply-side policies may address high home prices by increasing the housing supply, but may also subsidize construction that would occur anyway rather than expand the overall stock of housing. The impact of any tax incentive will vary depending on the specifics of each market. For example: Is the supply and demand of housing of the local market in balance? Is there available land to build on? What are the state and local zoning and land-use laws and building codes? Variation in these factors across markets raises the potential that modifying state and local housing policies could be more impactful in certain markets. There is also the potential that changes to federal nontax housing programs and regulations could be more effective at promoting homeownership than federal tax initiatives. Tax Options and Considerations Demand: Modify or Eliminate The MID The mortgage interest deduction (MID) is the tax provision most closely associated with homeownership. Current law allows an itemized deduction for interest paid on a mortgage secured by a principal or secondary residence. Past proposals to reform the MID have included reducing the maximum mortgage limit (currently $1 million or $750,000 depending on when the home was purchased), replacing the deduction with a credit, disallowing it for second homes, and eliminating it entirely. Most economic research indicates that the MID in the United States and MIDs in other countries have little to no effect on homeownership rates, but may encourage purchases of larger homes. This is primarily because the MID does not address the down payment barrier to homeownership or high home prices (it may, in fact, cause higher prices). Recent research suggests that removing the deduction could increase the homeownership rate if home prices, rents, and mortgage rates adjust in a manner that makes it easier to become a homeowner. Thus, it is unlikely any of the proposed modifications would significantly alter the deduction's effect on homeownership, though certain modifications could make it more equitable. For more information, see CRS Report R46429, An Economic Analysis of the Mortgage Interest Deduction, by Mark P. Keightley. Demand: Homebuyer Tax Credit Proposals to provide a tax credit to assist homebuyers have appeared over the years. Examples of bills that would provide a homebuyer tax credit in the 117th Congress include H.R. 2863 and S. 2820. A homebuyer tax credit was available to first-time buyers from April 2008 through 2010 with the objective of stabilizing falling home prices resulting from the 2007-2009 financial crisis. The credit was originally $7,500, but was later increased to $8,000. An advantage of a homebuyer tax credit over the MID is that it more directly targets home buying compared to the MID. A tax credit may also be more equitable since its value does not depend on one's tax rate, as with the MID (but may depend on the home's purchase price); does not require one to itemize; and can be made refundable, which can benefit more middle- and lower-income households. Critics point to two issues with a homebuyer tax credit. First, a credit may not help households overcome the down payment barrier unless there is a mechanism to advance the credit to buyers ahead of closing. Thus, a credit may benefit those already positioned to become homeowners rather than assisting those on the margin of ownership. Second, a tax credit could exacerbate high home prices in hot markets if sellers raise prices in response (and capture the credit's benefit). To the extent this happens, homeownership would be farther out of reach for more households. Demand: Down Payment Savings Account Allowing individuals to claim a tax deduction or credit for contributions to down payment savings accounts may assist more households in becoming homeowners than current incentives do by directly addressing the down payment barrier. Employers could also be allowed to make tax- deductible matching contributions to these accounts. Limited research on a Canadian program in existence from 1974 to 1985 suggests these types of accounts could boost homeownership. Still, there are a number of issues with this approach that policymakers may want to consider. First, down payment savings accounts could lead savings to be diverted away from other tax-preferred accounts used for retirement, education, and health care expenses, as well as traditional savings accounts households use, for example, for emergencies. Second, these accounts may be of little use

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