Agenda Summary
National Association of REALTORS®
2009 Midyear Legislative Meetings
Omni Shoreham
Ambassador Room, Lower Level
Wednesday, May 13, 2009
10:00 AM - 12:00 PM

Chair: Mike McGrew, KS
Vice Chair: Max Gurvitch, NY
Committee Liaison: Lance Lacy, TX
Committee Executive: Linda Goold

I. Call To Order

II. Approval of Previous Meeting's Minutes

III. Unfinished Business

A. First-time Homebuyer Tax Credit

The First-time Homebuyer Tax Credit (HTC) was changed as part of the 2009 Stimulus Package.  Below is a description of the previous HTC and the updated HTC.

If the home was purchased between April 8, 2008 and December 31, 2008
 - The tax credit is 10% of the purchase price, capped at $7,500.
 - The tax credit does need to be repaid, therefore working more as an interest free loan.  The credit is repaid out of your taxes over 15-years.
 - You cannot get the credit if the property is financed by a tax exempt qualified mortgage issue/bond.

If the home was purchased between January 1, 2009 and November 30, 2009
 - The tax credit is 10% of the purchase price, capped at $8,000.
 - The tax credit does not need to be repaid – the only exception being if the property is sold within 3-years of purchase.
 - You can get the credit if the property is financed by a tax exempt qualified mortgage issue/bond.

B. Estate Tax

The Economic Growth and Tax Reconciliation Act of 2001 set in motion a ten-year plan to increase the exemptions from the estate tax and lead to full repeal in 2010.  Effective in 2010, the estate tax will be repealed. In the interim, the amount of the exclusion will gradually increase from $675,000 to $3 million and the estate tax rates are gradually reduced from a maximum of 50% to a maximum of 45%.  However, in 2011, the estate tax laws will revert to the laws that were in effect on June 6, 2001.

As under prior law, the basis of assets received between 2001 and 2010 is "stepped up" to its fair market value at the time of death. When repeal comes into effect, the estate will not be taxed, but the basis of assets that heirs receive will be "carried over" so that the basis in the hands of the heir is the same as the basis of the previous owner.

Below is a chart showing the progression of the estate tax’s top rates and exemption maximum through its full repeal in 2010 and its reversion back to the old rates and exemption levels in 2011.

Originally it seemed as if Congress was going to address the issue of the estate tax in 2010, before the tax rates and exemptions returned to their old levels.  However, with the current economic downturn Congress is looking for an extension of the 2009 levels or a permanent compromise to the estate tax.

There are numerous ideas being floated around ranging from a temporary extension of the 2009 levels to a permanent fix through compromise.  One proposal that has already been introduced would be a permanent fix to the estate tax and would increase the exemption to $5 million (indexed for inflation) and decrease the tax rate to 35%.  In an odd twist, the $5 million/35% proposal was included in the Senate FY10 Budget resolution as an amendment.  However, immediately following the passage of that amendment another amendment was passed that provided a point of order against any estate tax provision (such as the $5 million/35% one) being passed until tax relief had been offered to lower-income individuals. 

The Obama Administration seems to be seeking a permanent compromise that would have an exemption of $3.5 million for individuals ($7 million for couples) indexed for inflation with a tax rate capped at 45%.

C. Tax Rates

Part of the FY10 Budget proposal from the Obama Administration is a change is some of the tax rates.  Single taxpayers who earn more than $200,000 (or more than $250,000 for couples) will see their tax rate return to its previous level of 39.6% in 2011.  Capital gains would also return to their rate of 20%, from its current 15%.  Dividends would be taxed at the 20% though, not at the income rate.  Carried Interest will be taxed as ordinary income, not as capital gains.
Those making $200,000 or less would not be affected by tax increases. The budget also seeks to make permanent the $800 per family "making work pay" tax cut, part of the recent stimulus bill, which the administration says will go to 95% of working Americans.

IV. New Business

A. Energy-related Issues -- Tax Implications

B. Bringing Back the Small Investor

C. Second Homes -- NAR Survey

D. The Hunt for Revenues -- MID and More -- or Less

The House and Senate have passed their FY10 Budget resolutions.  While these are just frameworks for the budget process and can change, they still lay out the areas of key interest for the Administration and for Congress.  The largest real estate related issue in the FY10 budget is a proposed change to the tax code that would limit the above the line deductions for those in the highest income bracket (over $200,000/year single filer and $250,000/year joint filer). 

Currently, this tax bracket is taxed at 35%.  When this bracket does an itemized deduction, that deduction reduces their income level, thereby cutting down their tax liability equal to their tax bracket.  An example of this would be if a person made $500,000 of taxable income in 2008, but had $200,000 in tax deductions.  Their original tax liability would be $175,000.  With their deductions, their new tax liability would be $105,000 – taking 35% of their $200,000 in deduction off of their tax liability. 

The new proposal would still tax the highest bracket at 35%, but would reduce how much their deductions can lower their tax liability to 28%.  Therefore, in the same example above, the new tax liability after deductions would be $119,000. 

Itemized deductions include a variety of tax breaks including state and local taxes, charitable deductions, medical expenses, and numerous others.  The reason this proposal concerns REALTORS® is that included in the tax deductions is property taxes and the Mortgage Interest Deduction.

While this proposal has been met with skepticism from both sides of the political isle, there is a strong push by the Administration and Democratic leadership to have this reform done as it would act as an offset for major proposals, including healthcare reform.

Both the House and Senate passed their budget proposals with this tax code change included.  While this does not mean that it will be part of the final package, it does mean they are willing to give it serious consideration.  C.A.R. and NAR have already contacted the California Delegation to express our objections to this change in the tax code, especially during the current housing climate.

V. Adjournment