Homeownership: Tax Policy Options and Considerations

Homeownership: Tax Policy Options and Considerations

September 23, 2022
Homeownership: Tax Policy Options and Considerations
This In Focus discusses three selected demand-side options
prices, rents, and mortgage rates adjust in a manner that
and three selected supply-side options for potentially
makes it easier to become a homeowner. Thus, it is unlikely
promoting homeownership. Pursuing any of the presented
any of the proposed modifications would significantly alter
options would require careful consideration about the
the deduction’s effect on homeownership, though certain
specific design of each. This In Focus does not address the
modifications could make it more equitable. For more
economics or desirability of promoting homeownership.
information, see CRS Report R46429, An Economic
For more on that topic, see CRS In Focus IF11305, Why
Analysis of the Mortgage Interest Deduction, by Mark P.
Subsidize Homeownership? A Review of the Rationales, by
Keightley.
Mark P. Keightley.
Demand: Homebuyer Tax Credit
In order to increase the homeownership rate, tax incentives
Proposals to provide a tax credit to assist homebuyers have
must help households on the verge of homeownership
appeared over the years. Examples of bills that would
overcome the barriers they face—mainly the down payment
provide a homebuyer tax credit in the 117th Congress
requirement and, in hot housing markets, high home prices
include H.R. 2863 and S. 2820. A homebuyer tax credit was
(relative to income). Demand-side policies may address
available to first-time buyers from April 2008 through 2010
both barriers if properly structured, but may also benefit
with the objective of stabilizing falling home prices
those who would become owners regardless, or sellers that
resulting from the 2007-2009 financial crisis. The credit
respond by raising prices. Supply-side policies may address
was originally $7,500, but was later increased to $8,000.
high home prices by increasing the housing supply, but may
also subsidize construction that would occur anyway rather
An advantage of a homebuyer tax credit over the MID is
than expand the overall stock of housing.
that it more directly targets home buying compared to the
MID. A tax credit may also be more equitable since its
The impact of any tax incentive will vary depending on the
value does not depend on one’s tax rate, as with the MID
specifics of each market. For example: Is the supply and
(but may depend on the home’s purchase price); does not
demand of housing of the local market in balance? Is there
require one to itemize; and can be made refundable, which
available land to build on? What are the state and local
can benefit more middle- and lower-income households.
zoning and land-use laws and building codes? Variation in
these factors across markets raises the potential that
Critics point to two issues with a homebuyer tax credit.
modifying state and local housing policies could be more
First, a credit may not help households overcome the down
impactful in certain markets. There is also the potential that
payment barrier unless there is a mechanism to advance the
changes to federal nontax housing programs and regulations
credit to buyers ahead of closing. Thus, a credit may benefit
could be more effective at promoting homeownership than
those already positioned to become homeowners rather than
federal tax initiatives.
assisting those on the margin of ownership. Second, a tax
credit could exacerbate high home prices in hot markets if
Tax Options and Considerations
sellers raise prices in response (and capture the credit’s
benefit). To the extent this happens, homeownership would
Demand: Modify or Eliminate The MID
be farther out of reach for more households.
The mortgage interest deduction (MID) is the tax provision
most closely associated with homeownership. Current law
Demand: Down Payment Savings Account
allows an itemized deduction for interest paid on a
Allowing individuals to claim a tax deduction or credit for
mortgage secured by a principal or secondary residence.
contributions to down payment savings accounts may assist
Past proposals to reform the MID have included reducing
more households in becoming homeowners than current
the maximum mortgage limit (currently $1 million or
incentives do by directly addressing the down payment
$750,000 depending on when the home was purchased),
barrier. Employers could also be allowed to make tax-
replacing the deduction with a credit, disallowing it for
deductible matching contributions to these accounts.
second homes, and eliminating it entirely.
Limited research on a Canadian program in existence from
1974 to 1985 suggests these types of accounts could boost
Most economic research indicates that the MID in the
homeownership. Still, there are a number of issues with this
United States and MIDs in other countries have little to no
approach that policymakers may want to consider.
effect on homeownership rates, but may encourage
purchases of larger homes. This is primarily because the
First, down payment savings accounts could lead savings to
MID does not address the down payment barrier to
be diverted away from other tax-preferred accounts used for
homeownership or high home prices (it may, in fact, cause
retirement, education, and health care expenses, as well as
higher prices). Recent research suggests that removing the
traditional savings accounts households use, for example,
deduction could increase the homeownership rate if home
for emergencies. Second, these accounts may be of little use
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Homeownership: Tax Policy Options and Considerations
to middle- and lower-income households that do not have
Supply: Incentives for Factory-Built Homes
the resources to save. If, however, contributions to these
A tax incentive to encourage the production of factory-built
accounts were allowed as an above-the-line deduction or a
homes could be an option for increasing the supply of
credit, this approach would better target these households
affordable homes for ownership. Factory-built homes are
relative to the mortgage interest deduction. Contributions
built in a factory and shipped for final assembly on site.
by high-income savers could also be limited or prohibited.
Factory-built homes include manufactured homes (which
are built in accordance with federal standards), modular
Third, it would likely take several years for this policy
homes, panelized homes, and precut homes. Research
approach to impact the homeownership rate, as households
suggests that factory-built homes cost less (on average) per
would need time to save enough to make a down payment.
square foot than traditional site-built homes. This is due to
The time needed would be longer if lawmakers imposed
cost savings in the production process stemming from the
annual contribution limits. It is difficult to generalize
division of labor and specialization, automation and
whether these accounts would speed up the transition to
technology, easier detection of construction defects, fewer
homeownership for all savers. Some may make the
weather delays, ability to locate factories in low-wage
transition sooner since the subsidy would allow them to
areas, and discounted bulk purchase of materials.
save more. But others may delay their transition to
maximize their tax benefit (e.g., with an annual contribution
Since factory-built homes are already more affordable (on
limit, a household may save less annually for a down
average) than site-built homes, it raises the question of why
payment than in the absence of these accounts).
a tax incentive is needed. Additionally, some have pointed
to nontax factors that have limited expansion of this market,
An alternative to down payment savings accounts would be
specifically state and local zoning laws that limit or prohibit
to modify the current rules pertaining to using tax-preferred
where factory-built homes can be located; buyers’ limited
retirement account funds to purchase a home. Current rules
access to financing; lower market appeal due to negative
allow individuals with an IRA to withdraw up to $10,000
consumer perceptions; and lower consumer demand due to
without penalty for the purchase of a first home. H.R. 4165
fewer customization options. Because a production tax
would increase that limit to $20,000, and H.R. 5078 would
incentive would not address these factors, such a tax
raise it to $25,000. Current rules also allow up to $50,000
incentive may have limited effect and could result in a
of 401(k) funds to be withdrawn for the purchase of a home
windfall to builders. An alternative would be to address the
contingent on the funds being repaid within five years. The
regulatory and financing aspects that are restraining the
repayment requirement could be removed.
market for factory-built homes.
Supply: Neighborhood Homes Investment Act
Supply: Taxing Large Institutional Investors
The Neighborhood Homes Investment Act (NHIA; H.R.
Some have expressed concern that institutional investors
2143, H.R. 5376, S. 98) would provide federal tax credits to
are contributing to the lack of affordable homes for
offset the cost of constructing or rehabilitating owner-
ownership by purchasing properties for rental purposes that
occupied homes in neighborhoods where house prices
could otherwise be purchased by individual owners. While
might not otherwise support such investments. Both the
media reports have highlighted this situation occurring in
income of the purchaser and the sales price of the home
certain markets, it is not clear that it is the primary force
would be capped to promote affordability. Eligible
impacting affordability in most markets.
properties would be those located in neighborhoods with
lower incomes and lower home prices, so this proposal
Several tax options pertaining to institutional investors are
would not address affordability concerns in hot housing
available. One option would be to increase the effective tax
markets. There would also be an annual state-by-state limit
rate these investors face by either applying a higher tax rate
on the number of credits that could be awarded, so every
on their real estate-related income or removing certain tax
eligible project might not receive tax credits.
deductions available to them (e.g., for accelerated
depreciation or interest payments). However, some or all of
A potential concern with the NHIA proposal is that
any tax increase could be passed through to tenants in the
developers may lower their sales prices below what they
form of higher rents. Policymakers may also want to
could otherwise receive (e.g., the sales price cap amount) or
consider ensuring that developers that utilize federal
not be as cautious containing development costs. This is
affordable rental housing programs and existing “mom and
because a lower sales price or higher development costs
pop” investors would not be impacted, and whether higher
would be offset dollar-for-dollar up to a maximum credit
taxes would discourage future housing development.
limit. All else equal, this would result in fewer total
properties receiving financing and would unnecessarily
Alternatively, a transfer tax could discourage future
increase the per-property cost to the government. A lower
purchases by these investors. To encourage the sale of their
sales price, however, would make homeownership more
current holdings, an exception to the tax could be provided
affordable. Another potential concern pertains to the NHIA
for sales occurring within, for example, three years of
data-reporting requirements and whether they would be
enactment. Another option to encourage sales would be to
sufficient to allow for evaluation of the credit’s
levy capital gains taxes annually on a mark-to-market basis.
effectiveness relative to alternatives, or for comprehensive
oversight. For more details, see CRS In Focus IF11884,
Mark P. Keightley, Specialist in Economics
Neighborhood Homes Investment Act: Overview and Policy
Considerations, by Mark P. Keightley.
IF12220
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Homeownership: Tax Policy Options and Considerations

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