Plan Would Allow Interest Deductions on 2nd Home

The Reagan Administration’s new tax overhaul plan, unlike the original version, would allow taxpayers to deduct mortgage interest payments on a second home, industry sources said Friday.

White House Chief of Staff Donald T. Regan recently assured real estate lobbyists that the mortgage interest deduction for vacation homes would be preserved in the new tax proposal, according to industry sources, but the property tax deduction on all homes is still expected to be dropped.

The original Treasury tax proposal, released last November, would have allowed full deductions only for a family’s principal residence and would have limited all other interest deductions to $5,000 above a taxpayer’s investment income.

Like the original Treasury plan, the new one would reduce tax rates and eliminate a number of tax breaks, including the current federal deduction for state and local tax payments.

Administration officials would neither confirm nor deny the information, but they emphasized that President Reagan could still change the plan’s provisions before he sends it to Congress. Reagan is expected to announce details of the new tax proposal later this month, probably within two weeks after returning from Europe next Friday.

In addition, the new tax proposal is expected to include a token corporate minimum tax, congressional sources said, a feature that was not included in the original Treasury plan because it was considered unnecessary.

Rising congressional sentiment in favor of some kind of minimum tax for corporations and wealthy individuals that currently escape federal income taxes led to the proposal to include a minimum tax in the new Treasury tax proposal, Senate sources said. It would be offered as part of a strategy to head off efforts by Democrats to enact a minimum tax to raise revenues to be included in their alternative budget proposals to the three-year, $300-billion package of spending cuts offered by the Senate Republican leadership and the White House.

“This is all part of the political ballet that is going on up here all during the budget debate,” one Senate staff member said.

The Treasury plan now also is expected to include a modest tax on employer-paid health insurance premiums, but the new version is not likely to tax much more than the first $100 or so of such fringe benefits.

Capital Gains Proposal

Treasury officials also have told business lobbyists and leading congressmen that they expect to drop the original complex proposal to adjust depreciation, interest income and payments and capital gains to reflect inflation.

But one tax reform advocate described Treasury officials as “fighting” to retain their original capital gains proposal, which would have ended the current exclusion of 60% of the profits from investments and replaced it with a system that would have avoided taxing, as the Treasury proposal put it, “fictitious gains that merely reflect inflation.”

The capital gains proposal has been one of the most difficult issues to deal with, Treasury officials have acknowledged publicly. At one time, they were considering a proposal to retain the exclusion for investments in “venture capital,” but that idea has been scrapped because it appeared to be impossible to implement.

The latest plan, lobbyists said, is to modify the exclusion for long-term capital gains so that it would keep the top rate on such profits at about current levels. Under current law, long-term capital gains are taxed at a maximum rate of 20% for individuals and 28% for corporations.

Endorsed by Reagan

Unlike the original Treasury tax reform proposal, which was not embraced by the White House, the new plan is supposed to be endorsed by Reagan and presented as an Administration package. The original plan was prepared under Regan, who became White House chief of staff in February after switching jobs with James A. Baker III, now the Treasury secretary. The new proposals from Baker have been actively under review by Reagan and White House officials since last month, Administration officials said.

Ever since the original tax proposal was released last November, it has been under attack by various groups that fear the massive overhaul would harm their interests. Among those who have been most up in arms are realtors and builders of vacation homes, who say that potential buyers have been scared off by the threatened loss of part of the interest-expense deduction.

According to real estate officials, sales in virtually every second-home community from Palm Springs to Rocky Mountain ski resorts and Florida developments have weakened as much as 50% since last year.

The new Treasury package, sources said, would continue to allow a full deduction for all mortgage interest payments, but it is still expected to limit deductions for other interest payments, such as those for credit card and automobile loans.