Due to the tremendous response by a lot of very smart commenters on my earlier post: A completely new proposal to save the real estate market. It's not as crazy as you might think! I have honed the idea based on the great feedback proffered by those that made so many excellent comments.
The idea was a dollar for dollar federal income tax deduction for down payments on the purchase of a home for any homebuyer that elects to take the deduction.
First and foremost, the deduction would be a one-time opportunity, and could be used on a first or second personal residence. Investment property is not included. (BTW investors already recover their purchase price over time as depreciation)
Secondly, the deduction would go against the cost basis of the property. In other words, like depreciation, the deduction would be subtracted from the cost basis. At the time of sale, the tax consequences would be the same as any other homeowner who has tax exemption opportunities for a sale.
Third, any new subsequent loans bowered against the property in excess of the cost basis would be treated as ordinary income. This would prevent someone from paying a lot down and then refinancing.
Don’t forget that the suggestion is to provide a deduction and not a credit. Many high-income taxpayers would be fall under the Alternative Minimum Tax section and would still have tax liabilities.
This idea isn’t just about selling more homes. It’s about buyers having more skin in the game which would add stability to the market. Don’t think of it as a subsidy; it’s more if a tax deferment much like a 1031 exchange.
But It could jump start the market during these tough days!
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