TaxProf Blog

Editor: Paul L. Caron, Dean
Pepperdine University School of Law

Thursday, April 25, 2013

Ventry: Reconsidering and Improving Existing Tax Subsidies for Housing

Dennis J. Ventry, Jr. (UC-Davis), Reconsidering and Improving Existing Tax Subsidies for Housing (PowerPoint slides here):

This testimony was given before a Joint Informational Hearing of the California Assembly Committee on Housing and Community Development and Committee on Revenue and Taxation on March 18, 2013 to provide a framework to assist the Committees in thinking about the advantages and disadvantages of using the tax system to subsidize aspects of housing policy in California.

Chief among his recommendations, Professor Ventry urged the committees to redesign all of the state’s tax expenditures purporting to promote homeownership. In particular, he advocated (i) abandoning federal adjusted gross income (AGI) as the starting point for determining state income tax liability, a move that would add billions of dollars in revenue to California’s coffers; (ii) eliminating usage of tax deductions as a delivery mechanism for housing tax benefits; (iii) restricting basis step-up on inherited property to cases of hardship; (iv) limiting the exclusion for capital gains on home sales by accounting for built-in gains due to inflation (in order to tax only real gains and not nominal gains); and (v) enacting a “Homeownership Tax Credit” in lieu of both the mortgage interest deduction and the property tax deduction.

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It would definitely be more fair to tax 100% of inflation-adjusted gains than to take nominal gains minus $250k/$500k. It would reduce flipping activity too.

Any restriction of step-up would need a floor amount, such the federal one when the estate tax rate was zero. Nobody needs the headache of auditing small-time heirs and making them prove what grandma paid for her house in 1965 plus all the expensive remodeling since then. That's why the rule exists in the first place.

The author is not at all clear on whether inflation adjustment would be allowed in the step-up basis calculation. Are the inflationary gains to be excluded on death or not?

A basis floor at 50% of current market value would fix some of the administrative problems.

Posted by: AMTbuff | Apr 25, 2013 12:40:45 PM