Photo by Pete Souza
President Barack Obama once again is calling for a cap on the value of itemized deductions, including the mortgage-interest and property-tax deductions, in his 2014 federal budget request. The cap would limit the value of deductions to 28 percent for households in the higher tax brackets, which means the value of deductions for taxpayers in the 33 percent, 35 percent, and 39.6 percent tax brackets would be limited to 28 percent. This type of fiscal action could have a significant effect on many owners of Santa Barbara real estate, including owners of Montecito homes.
The president has sought the cap every year he’s been in office, and it has never moved beyond the proposal stage. Analysts say it’s unlikely to move beyond that stage this year.
Under the federal budget process, the president’s budget request serves as the administration’s statement of priorities, which Congress can consider as it crafts an overall budget blueprint for the year. The budget, when one is passed by both Houses of Congress, serves only as a fiscal guidepost for lawmakers and does not have the force of law.
For real estate, the budget request is largely a rehash of previous proposals. The president is once again seeking to raise taxes on general partners in investment partnerships by taxing their carried-interest income at ordinary rates rather than the capital gains rate, which is lower. The provision is perhaps largely directed at hedge fund managers but managers of real estate investment funds could be affected as well.
The Obama budget is also seeking to return the taxation of estates to 2009 tax rate and exemption levels, beginning in 2018, which would effectively reverse changes enacted into law in 2010 and earlier this year as part of the “fiscal cliff” legislation. Those earlier changes exempt from estate tax the first $5 million in individual estates and $10 million for couples. Under the Obama plan, those exemptions would be reduced to $3.5 million and the tax rate increased to 45 percent (from today’s 40 percent).
On the positive side, the President’s budget would expand and make permanent the current-law tax deduction for energy-efficient commercial building property. Also, the budget would extend through 2015 the current-law provision that excludes from income the cancellation of home mortgage debt on a principal residence, which is now set to expire at the end of 2013.
As in previous years, the administration is seeking new funds for infrastructure development and improvement, including $40 billion for the most needed repairs and another $10 billion for development. The budget request also seeks money to help states and localities work with private partners to repair or demolish vacant and blighted homes in areas hit hard by the foreclosure crisis.
Also as in years past, the administration wants to make its Home Affordable Refinance Program (HARP) available to underwater households who don’t have a federally backed mortgage. Right now, the program, which provides lenders and households with incentives to refinance into affordable financing under a streamlined process, applies only to those with a mortgage backed by Freddie Mac or Fannie Mae. The FHA has a streamlined refi program, too, but there’s nothing for households whose mortgage has no federally backing.
To help bring new revenue into the budget, the administration once again is calling for a fee to be levied on the country’s large banks that received financial help from taxpayers during the mortgage crisis. The fee would generate almost $60 billion over 10 years.
To help it dispose of excess or underused federal property, the administration would create a commission to look at the government’s real estate holdings and identify properties for disposition, similar to what it does for underused military bases. The commission would function much like the Base Realignment and Closure Commission (BRAC) and seek to dispose of $2 billion in property over the next decade.
Overall, the budget would cut $1.8 trillion from the federal deficit over 10 years, the administration says, although analysts estimate actual deficit reduction would be between $600 billion and $1.2 trillion, depending on assumptions used, because the budget would replace the automatic annual spending cuts under “the sequester” with cuts that are more targeted but don’t amount to as much in deficit reduction.
—Robert Freedman, REALTOR® Magazine