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Washington Coalition Targets Wealthy for Home Buying Reforms

NEW YORK ( TheStreet) -- Among the cherished rights of homeowners, two stand out: the tax deduction on mortgage interest payments and the tax exemption for profits on a home sale. If a Washington-based coalition has its way, both would be cut for wealthier homeowners.

At the same time, the coalition proposes an IRA-like savings account to allow prospective homeowners tax exemption on savings for a down payment. That begs the question: Under today's conditions, what is the best way to save for a down payment?

The coalition's proposals may never go anywhere, but they do show that anything could be on the table as Congress and the administration look for tax reforms.

Membership in the group Smart Growth for America includes environmental organizations, developers and investors and others focused on sustainable development, largely with a focus on making cities more livable. Its housing proposals would leave long-standing government support in place for homeowners of low and moderate incomes, but reduce benefits for wealthier property owners.

The coalition, for instance, recommends eliminating the mortgage interest deduction on second homes. For primary residences it would reduce the maximum debt to which the deduction could be applied to $500,000 from the current $1 million. It also recommends limiting real estate tax deductions for households making more than $100,000 a year.

And it would cut in half the tax exemption for profits on a home sale, setting a $125,000 limit for individuals, $250,000 for couples filing joint returns.

The group also wants Congress to establish Mortgage Savings Accounts that, like tax-deductible IRAs or 401(k)s, would provide a tax exemption on income set aside for the down payment on a first home. Withdrawals would be tax free if used for a down payment within 10 years of the account's establishment. Unused money would be taxed as income. The coalition estimates the program would cost the government about $10 billion in tax revenue over the first 10 years.

In the wake of the financial crisis, lenders typically require 20% down payments, creating a high hurdle for first-time buyers. Of course, that requirement may ease as the housing market and economy get healthier, and as lenders get hungrier for loan applications.

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