House Votes to Repeal Penalty on Loan Rates

The House on Thursday voted to repeal a law requiring sellers of real estate to charge prevailing interest rates on loans or pay a penalty to the Internal Revenue Service.

The measure, which passed by voice vote and now awaits expected Senate passage, would kill the so-called “imputed interest” provision of the 1984 Deficit Reduction Act. Imputed interest was included in that law to combat tax-shelter schemes by ensuring that transactions were taxed as if prevailing mortgage rates applied.

Before 1984, sellers arranged loans at interest rates below those available at banks or other lending institutions. Buyers, in return, agreed to pay a higher sales price.

That meant a seller could count the income from a loan’s principal as capital gains, which receive preferential tax treatment. On higher-priced commercial transactions, buyers could also claim bigger tax breaks from depreciation and investment tax credits.

Real estate lobbyists argue that repeal of the penalty is necessary so that individuals can buy and sell houses at below-market rates without government interference.