The State & The Fed Proposals on Property Taxes & Mortgages

Many changes are on the horizon.  State and Federal lawmakers are looking to alter tax plans and ease the mortgage crisis that will affect every property owner.  These proposals are just that, proposals.  They still have to go through the legislative bodies and be signed into law.  As all things political are concerned, there will be debates and probably some changes.  However, considering this is an election year, I don’t anticipate a lot of fight from either side of the aisle in getting these proposals passed.  Property owners are hurting and the legislators are hearing from their constituents.  Something must and will be done, and it will be done sooner than later.

The State of Indiana is looking at the biggest changes that will have a direct impact on every property owner throughout the state.  Property taxes have increased on average by 50% from tax year payable 2006 to tax year payable 2007.  Many property owners saw their property tax bill increase by 100% and still other saw 200%+ increases in their tax bills.  The full impact of those increases is yet to be seen.  Mitch Daniels, Indiana’s Governor, suspended those tax bills for many counties early in the summer.  The reason being, assessed values were not correct due to faulty assessment practices.  Many properties were assessed at the wrong value and consequently, their tax bills were incorrect.  The Governor ordered those counties to reassess every property in those districts.  Once that reassessment is complete, new tax bills were to be sent out.  As a result, all property owners were required to pay the May and November 2007 property tax installments based upon the 2006 property tax bills, which did not include the 2007 increase.  As a resolution, a third bill will be mailed out and due in the Spring of 2008.  That third bill will reconcile the difference between the amount paid and the amount that should have been paid in 2007.  Are you confused?  So is practically every other resident.
To take care of that issue, Governor Daniels spoke on a live television news broadcast last night to outline sweeping changes.  Those proposed changes are as follows:
Cut property taxes - The Governor’s proposal calls for the State to take over school operating, school transportation and child welfare levies.  Not only will the move provide REAL property tax relief, it will also cut out some of the overwhelming complexity of property taxes, thereby allowing taxpayers to more easily determine who is responsible for property tax spending.  These cuts will be funded by a one-cent sales tax increase.  In addition, Mr. Daniels is proposing to enact a State Constitutional Amendment to permanently set the rate for property taxes.  The set rates would be 1% for homeowners, 2% for rental property, and 3% for business property.  Those percentage rates are based upon the fair market value for those properties.  Those changes will amount to an average of approximately 33% reduction in everyone’s property tax bill.
Fix the assessment system - Through a variety of structural changes, the assessment system will be fixed.  Governor Daniels’ proposal includes two of those structural changes - the elimination of township assessors and the appointment of county assessors.  This will create fewer and larger assessment jurisdictions, leading to equitable, fair market value assessments.  This will also remove the political pressure from assessors, who are charged with ministerial, not policy-making duties.

Those changes are monumental and have long been needed.  Of course we would all prefer to not pay property taxes at all, but that is something that will not happen.  Governor Daniels even mentioned last night that he looked into eliminating property taxes, but that it was something that could not be done.
The Federal Government is taking on the issue of the mortgage problems.  Bill H.R. 3648, Mortgage Forgiveness Debt Relief, includes four changes to the current law:
First, the permanent exclusion from gross income of discharged home mortgage indebtedness.  The bill would provide for a permanent exclusion for discharges of up to two million dollars of indebtedness (on or after January 1, 2007), which is secured by a principal residence.  Instead of including this amount as income, the basis of the individual’s principal residence would be reduced by the amount excluded from income under this bill.  In other words, if an individual loses their house due to foreclosure, the lender will give the borrower a 1099 that includes the amount of debt that was forgiven as a result of the foreclosure.  The borrower would then have to claim that amount as income on their 1040 and pay taxes on that income.  This bill would eliminate that tax.
Second, long-term extension of the deduction for mortgage insurance.  The bill extends the deduction for mortgage insurance for seven years (through the end of 2014).  The bill would provide that payments will quality for this deduction whenever they are paid so long as the contract is entered into after 2006 and before 2015.
Third, modification of the qualifications tests for cooperative housing corporations.  The bill would modify the requirements for qualifying for the special rules available to cooperative housing corporations.  Under current law, a coop housing corporation must meet several requirements, including a requirement that 80 percent or more of the coop housing corporation is earned from the corporation’s tenant-stockholders.  The bill would provide two alternatives to this 80 percent rule (ie. one based on square footage and another based on coop expenditures).  These two alternatives will make it easier to quality as a cooperative housing corporation.
Lastly, modification of exclusion of gain on the sale of a principal residence.  The bill amends the current law exclusion of up to $250,000 for a single person ($500,000 if married filing jointly) of a gain realized on the sale or exchange of a principal residence.  Under the bill, if a taxpayer moves their principal residence to a second home, the taxpayer will only be able to utilize this exclusion to the extent that it relates to the period of time when the homes was first used as a principal residence.
As mentioned above, these are only proposals and are not law.  Overall, I believe these changes to be a step in the right direction.  Time will tell what the actual impact will be.  I am keeping my eyes and ears open.  What do you think?

-B

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Posted by Clayton October 2007

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