Watch out: Home real estate is back in the sights of Capitol Hill tax reformers.

The staff of the nonpartisan Joint Committee on Taxation has proposed new options for closing the "tax gap," the difference between federal taxes that should be paid under current tax rules and the amounts collected by the Internal Revenue Service. Recommendations from the committee staff carry substantial weight with members of the Senate and House, and frequently get included in tax legislation.

High on the list of methods to collect more of what is owed is to tighten up on homeowners’ billowing write-offs of local and state property taxes, which cost the government about $20 billion a year in revenues.

Under the federal tax code, local real estate taxes on homes generally are deductible. But they are not deductible if the tax payments cover commonplace special assessments designed to pay for improvements that directly benefit taxpayers’ real estate. Examples include local "user fees" for water mains, sewer lines, sidewalks, trees and trash collections.

The problem, according to the tax committee staff, is that current federal law does not require local governments to tell the IRS about property owners’ mixes of regular taxes and nondeductible special-benefit levies. Local governments often provide annual property tax statements to residents with breakouts of assessments. But many homeowners simply deduct the bottom-line taxes paid.

As a result, according to the committee, homeowners get to write off hundreds of millions of dollars a year for tax payments that are not legally deductible. In a 1993 study, the Government Accountability Office estimated that $400 million of that year’s $11 billion in property tax write-offs claimed by homeowners were improper. With deductions this year running nearly double that amount, wrongly claimed write-offs could be in the $700 million range or more.

The committee proposes two possible solutions: Require local governments to provide copies of homeowner tax statements to the IRS with breakouts distinguishing between regular and special-benefit assessments; or require mortgage lenders and loan servicers to report details of homeowners’ property tax escrows with similar breakouts.

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