May 2012
Taxation and Government Finance Committee
Federal Committee
This material is for discussion purposes only and has not been approved by the Taxation and Government Finance Committee, Federal Committee, Executive Committee or the Board of Directors.
Issue:
Should C.A.R., in conjunction with NAR, “SUPPORT” further easing tax penalties on retirement accounts to encourage and allow for the use of retirement funds for the purpose of purchasing real property and/or to assist troubled homeowners in avoiding foreclosure?
Action:
Optional at this time
Options:
1. Take a “SUPPORT” further easing tax penalties on retirement accounts to encourage and allow for the use of retirement funds for the purpose of purchasing real property and/or to assist troubled homeowners in avoiding foreclosure.
2. Take an “OPPOSE” further easing tax penalties on retirement accounts to encourage and allow for the use of retirement funds for the purpose of purchasing real property and/or to assist troubled homeowners in avoiding foreclosure.
3. Take no action
Status/Summary
During C.A.R.’s Winter Business Meetings in Indian Wells, the Taxation and Government Finance Committee discussed different ideas that had been presented at a NAR Housing Summit. The majority of these ideas focused on expanding the U.S. tax code to make it easier for individuals to utilize their retirement savings for the purpose of home purchases or to avoid foreclosure. Staff was asked at that time to prepare a briefing paper for the May meetings.
Below are the specific recommendations that had been discussed at NAR’s Housing Summit. These issues were presented to NAR members at both the Summit and during their November Business Meetings in 2011.
1. HOMEK
Individuals who have access to an IRA, Roth IRA or 401(k) plan would be permitted to allocate up to 50% of their savings in the account to a downpayment account for a first-time homebuyer. Employer matching funds could not be part of the allocation. Withdrawals for the purchase would be penalty-free. They would remain taxable as ordinary income, but the tax rate would be sharply discounted. A lifetime limit of $50,000 for downpayments is imposed
2. Penalty-free IRA Withdrawals
Allow individuals who are in arrears on their mortgage payments to access up to $10,000 onetime from their IRA account without penalty, though still treated as ordinary income, so they may keep their home.
Background:
Government has long used the tax code to promote and encourage homeownership. These tax incentives include popular and often utilized benefits such as the mortgage interest deduction. Others are less known, such as the ability to access an individuals’ retirement account.
Individual Retirement Account (IRA)
A first time homebuyer may take out up to $10,000 from their IRA for the purchase of a home without having the 10 percent penalty for early withdrawal apply; though the money will be taxed as ordinary income. If a spouse is also a first time homebuyer then they also will qualify for the $10,000 in addition to the first $10,000. A spouse is not required to have their own IRA, so they can withdrawal $20,000 from one IRA. This applies for spouse, children, grandchild or a parent. The money must be used within 120 of withdrawal in order to qualify.
For a Roth IRA the $10,000 withdrawal is allowed, but there is a five-year requirement for the funds to be in the account. Because the money in a Roth was not tax deductible and earning are tax-free there is the possibility this withdrawal will have no tax bill.
401(k)
With employer permission, individuals can take a loan against their 401(k) up to half of their vested balance or $50,000, whichever is less. Withdrawals made for hardship purposes after the loan has been maxed out are subject to the 10% penalty and contributions to the 401(k) are prohibited for six months (This can only be done with employers’ consent).
A 401(k) loan, as described in a 2010 Forbes article “Tap Retirement Funds to Buy a Home?” is not:
“Like pledging retirement funds as security for a bank loan—you’ll really be selling stocks or bonds owned in the account and using the proceeds to fund your loan to yourself. You’ll make principal and interest payments back into your 401(k). So where your 401(k) previously owned stocks or bonds, it will now own a fixed-income investment in you.”
In certain circumstances, employers and lenders can work together to place the 401(k) loan as a lien on the property. This makes the interest on the payments tax deductible. This is rarely done though and can be complicated.
Outlook:
There are no bills that propose either of these ideas; however, all existing tax bills on the Hill have stalled. The Congress has refused to address expiring tax cuts and are not looking at new tax cuts without offsetting provisions. The budget deficit and fiscal concerns of a debt ceiling that needs to be increased soon is preventing Congress from passing any tax legislation that would add to the fiscal deficit.
Support:
Supporters are saying:
• With the increasing price of homes $10,000 isn’t very much to go towards the purchase of a property.
• Homeowners should have every opportunity to keep their homes and avoid foreclosure.
• These tax deductions would help spur a recovery in the housing market and speed a recovery of the nation’s overall economy.
Opposition:
Opponents are saying:
• For the last four-years, C.A.R. and NAR have opposed all efforts by lenders and investors to go after the retirement funds of troubled homeowners so that if a property cannot be saved the homeowner’s retirement savings are not at risk. This could encourage lenders and investors to begin denying short sales to homeowners without contributing from their retirement accounts.
• The environment in DC is not conducive to a discussion of broadening tax incentives that would cost money.
o There is growing belief in DC that there are too many incentives for homeownership and that tax incentives should be reduced or eliminated.
o If these cost money, REALTORS® will have to be ready to give up a tax benefit somewhere else to pay for this.
o Every budget proposal put forward by the President, and the bi-partisan panels and commissions have recommended reducing tax incentives for homeownership.
o REALTORS® should be looking to conserve their bullets to protect the tax benefits we have.
• There are already tax benefits that allow homebuyers to access their retirement accounts. Opening real estate provisions of the tax code at this time may allow for changes to be made that we won’t like.
C.A.R. Policy:
C.A.R. does not have specific policy on this, but we have historically supported tax legislation that incentivizes and encourages home ownership.
NAR Policy:
The proposals in this paper stemmed from a NAR Housing Summit and were discussed during NAR’s Federal Taxation Committee’s November Business Meetings in Anaheim. NAR decided not to take a policy position on these issues.
