President Obama’s $3.8 trillion FY 2013 federal budget would limit the mortgage interest deduction for families with incomes over $250,000 — a change that would harm home owners and potentially lower home values at all price levels, says Moe Veissi, president of the NATIONAL ASSOCIATION OF REALTORS®.

“While progress has been made in bringing stability to the housing market, the recovery has been slow,” Veissi said. “The nation’s home owners already pay 80% to 90% of U.S. federal income taxes. Raising taxes on them, now or in the future, could critically erode home values at all price levels. This would destroy middle-class wealth accumulation and trillions of dollars in home values nationwide.”

The President’s proposal would cap itemized tax deductions at 28% for married taxpayers filing a joint return with income over $250,000, and for single taxpayers with income over $200,000. The current cap is 33% or 35%.

The limit would apply to all itemized deductions including the mortgage interest deduction, employer-sponsored health insurance, and retirement contributions. The White House says the change would reduce the deficit by $584 billion over 10 years.

“NAR firmly believes that the mortgage interest deduction is vital to the stability of the American housing market and economy,” Veissi concluded. “We urge the president and Congress to do no harm.”

Taxing forgiven mortgage debt

The president’s budget proposal also included an extension of a tax rule that keeps home owners from having to pay extra income tax when a lender agrees to forgive part of their mortgage as part of a short sale or loan modification.

Before 2007, when a lender forgave your mortgage, you had to pay income tax on the amount of forgiven debt. Congress passed an exemption to that rule — but the exemption runs out at the end of 2012. Obama wants to extend the exemption to any debt forgiveness agreements reached by Jan. 1, 2015.

Energy retrofit rebates

The President’s budget proposal also calls for $6 billion to expand home energy retrofits. Obama would like to revive the Home Star program, which passed the House of Representatives in 2010 but never won over final congressional approval. The Home Star program would grant home owners rebates for efficiency upgrades, including sealing ducts, installing efficient water heaters and heating units, windows, doors, and adding insulation. The program was previously dubbed “cash for caulkers.”

Still, some are skeptical the full $6 billion will win final approval. “While Home Star is unlikely to make it through Congress (this year) due to its price tag, we hope something more modest might be able to move forward,” Steven Nadel, executive director of the American Council for an Energy-Efficient Economy, told USA Today.