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Originally published Saturday, July 26, 2008 at 12:00 AM

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Nation's Housing

Homeowners who don't itemize likely to get new federal tax deduction

A proposed federal law would effectively add another tax preference for people who own houses while offering nothing to those who rent.

Syndicated Columnist

The giant federal housing and foreclosure relief legislation being considered by Congress this past week contains a little-noticed — but potentially far-reaching — change in real-estate tax policy.

It would permit millions of homeowners who do not itemize on their federal tax filings to claim a deduction for at least a portion of their local and state property taxes.

Though the version of the bill approved by the House this past week and still being debated in the Senate on Friday set the maximum write-off at $350 a year for single taxpayers and $700 for married joint filers, the Senate's more generous $500 and $1,000 deductions were expected to prevail in the final compromise version.

Originally intended as a one-year economic-relief measure for Americans who do not itemize, tax experts say it's highly likely that the new write-off will turn into a permanent feature in the tax code.

As proposed, it would apply only to tax returns filed on 2008 incomes, and cost the federal treasury $1.2 billion to $1.5 billion for the year. The concept originally surfaced in February in the Senate's version of the national economic-stimulus package but was left out of the final deal with the House.

According to an analysis of 2005 IRS data by the nonprofit Tax Foundation, only 35.6 percent of taxpayers — tenants and homeowners — itemize on their returns.

In West Virginia, 18 percent of taxpayers itemized in 2005. Only in Maryland, a relatively high-income state, did more than 50 percent itemize.

Among homeowners nationwide, an estimated one-half itemize, but one-third of all homeowners have no mortgage debt against their property, and therefore do not claim mortgage interest as a deduction.

The new legislation would effectively add another tax preference for people who own houses while offering nothing to those who rent.

The idea, say supporters, is to provide greater tax fairness for a huge category of owners — often seniors and lower- to moderate-income households — who opt for the standard deduction but also pay local and state property taxes. Critics of the plan say it's just another example of the government's inequitable approach to housing policy — overemphasizing the financial benefits for homeownership vs. renting. Some critics argue that these heavy tax subsidies for ownership helped stimulate buyer mania during the boom years, along with zero-down and "stated-income" financing that put thousands of people into real estate they could never afford.

"We think [the new deduction] is terrible policy," said James Arbury, senior vice president for government affairs of the National Multi Housing Council, the country's principal trade group for developers, owners and managers of rental property.

"It actually makes things worse" by sweetening the pot further for ownership while ignoring tenants, the vast majority of whom also don't itemize deductions.

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"Many renters are under the same economic duress as owners," Arbury said. "But nobody is giving them new tax deductions."

The National Multi Housing Council has long fought to convince Congress to take a more evenhanded approach in supporting taxpayers' housing choices.

"We understand why members [of Congress] would want to put more goodies in homeowners' baskets," Arbury said.

Owners outnumber renters roughly 2-1 and have influential lobbies such as the National Association of Realtors and the National Association of Home Builders pushing their interests year-round. But renters ultimately end up paying for part of the subsidies that flow to owners, and that's not fair, Arbury and other critics say.

The Senate version of the housing bill provided the larger maximum deductions but also contained language clouding the use of the write-off in jurisdictions that raise property rates starting immediately after enactment of the legislation through Dec. 31 of this year.

The House was expected to demand removal of those restrictions as the price of accepting the Senate's higher limits. Although specific procedural details were not spelled out in the legislation, all owners who opt for the standard deduction on their 2008 tax filings are expected to be eligible for the new write-off benefit.

Kenneth R. Harney: kenharney@earthlink.net

Copyright © 2008 The Seattle Times Company

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