Saturday, September 29, 2007

Law Street (The Economic Times-Sept) - on Housing Loans

Home sweet home. Both Zenobia Aunty and I are exhausted. We are recovering from a viral - so I guess we are both glad to be at home and in our very own comfortable beds.
Yes, there is no place like home. This article is on housing loans and dear readers, I hope you enjoy this article. As always the url is here and the article is also cut and pasted below.

A taxing connection

Friday, September 28, 2007

"Haven’t you read about the subprime fiasco," screeched Zenobia Aunty over the phone to one helpless caller, trying to sell her a personal loan. Well, I guess Aunty’s screeching will continue since, for some strange reason, she could not successfully register with her mobile phone service provider to enlist herself on the "Do Not Call Registry". The SMS sent at the number provided bounced back with the message — this facility is not available to you!

T K Arun, one of her favourite columnists in this paper, has already written about subprime. But Aunty decided to dig deeper and find out whether she could put the blame on taxes! She found she could, but not on tax per se but rather on tax incentives.

With a network of tax blogger friends, Zenobia Aunty’s life has become easier. She no longer has to visit various networking events in Bangalore and Mumbai. With Bangalore’s flooded roads and Mumbai’s distances — the two cities she alternates between, cyber surfing is an easy way to get the required information. In fact, one marvels at her capacity to meet interesting people in cyber space and get a varied global view.

Her US based blog pal, Kelly an attorney who blogs on “TaxGirl” recently told a friend that it is unlikely that mortgage interest deductions would be repealed in the US, even as tax policies are used to encourage or discourage certain behaviour. However, TaxGirl is having second thoughts of the likely move of the US government. The subprime bailout will reportedly cost the US government over $10 billion per year. Raising taxes is always an unpopular option, anywhere in the world. So to Kelly, repealing tax policies does not sound as bad on paper. Kelly adds on her blog that in November 2005, the advisory panel on tax reform under President Bush recommended eliminating the mortgage interest deduction and replacing it with a significantly smaller mortgage interest credit. The panel also recommended eliminating the deduction completely for second homes and home equity loans. Quite a few taxpayers bought more houses than they could afford over the last few years, as at least the interest was tax deductible. Zenobia Aunty understands that the US currently limits mortgage interest to mortgages under $1,000,000 and home equity loans under $1,00,000. Unless, AMT is applicable, individuals enjoy a cool tax break.

Prof James Edward Maule of the “Mauled Again” tax blog fame, with whom readers of this column are familiar, cites that in extreme cases not only do people end up losing their homes owing to foreclosure but they also find themselves with increased taxable income and thus increased tax liabilities to the extent that the loan is written off for an amount less than the principal balance. This happens if the value of the house has declined and the lender does not or cannot hold the borrowers accountable for the balance. In April this year, a bill was introduced in the US House of Representatives to propose that income from cancellation of qualified residential debt is excluded from gross income, followed by another similar legislation introduced in the US Senate. The US Prez has now jumped on the bandwagon to help homeowners.

However, Prof Maule points out that this tax break would mean either higher taxes or an increased deficit — the burden of which has to be shared by future generations. This brings one back to India. Here, the subprime sword is not dangling above the heads of borrowers and lenders, yet it is always prudent to learn a lesson.

This leads one to wonder about the tax laws prevailing in India. For instance, repayment of the principal sum against a home loan is permissible as a tax deduction up to a limit of Rs 1 lakh. Further, such home has to be retained for the next five years. Interest can be claimed as a deduction of up to Rs 1.5 lakh per year. Yes, there are tax breaks available here as well. At the same time repealing this, as was suggested by the Kelkar committee, could put paid to many a dreams of enjoying not only roti and kapada but also makaan. In fact, this columnist wonders whether the tax sops in India are equitable, given the wide disparity of property rates across cities, say, from Mumbai to Hyderabad. Tax sop or not, buying a house in Mumbai is tough indeed for you or me. With interest rates no longer as soft as they once were, even with the tax breaks available a new home owner who has borrowed funds, could feel the pinch.

So should governments think out of the box and devise an alternative? Perhaps a property purchase deduction — be it a lump-sum deduction or an amount amortised over a period of time, such as depreciation, spread over a certain number of years. Perhaps this could also be limited to one house per individual. This may curb the tendency of taking a loan, just because you get a tax break, howsoever small. Instead it could well encourage savings and then investments.

As Zenobia Aunty does not profess to be an expert on housing loans, she just leaves you with this thought. It is over to you dear readers

1 comment:

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