Repeal of Minimum Interest Rule Blocked

In the worst tradition of “The Perils of Pauline,” the real estate industry’s last-ditch effort to snatch seller-financing out of the clutches of the federal government died on the very brink of success last week. But suffering, hopefully, a temporary “death.”

Despite the House of Representatives’ resounding voice veto of the so-called “imputed interest” provision of the 1984 Deficit Reduction Act just before adjournment--a measure penalizing sellers if they offer buyers an interest rate less than above-market rates--the widely anticipated finalization of the veto by the Senate failed when one senator single-handedly prevented the measure from coming to a vote.

“At least for the time being, then,” according to Joel Singer, director of research for the California Assn. of Realtors, “we’re right back where we were when the Deficit Reduction Act went into effect on June 30.”

Under this ruling, the seller of real estate (with a few exceptions such as principal residences selling for $250,000 or less, farms valued under $1 million, and a few minor ones) must charge an interest rate no less than 110% of the rate prevailing at the time on federal obligations of similar maturity. Failing this test, the Internal Revenue Service will impute an interest rate equal to 120% of such obligations.

The real estate industry, nationally, vigorously opposed the measure when it was introduced, and the nature of that opposition was expressed by Singer when he pointed out that a full 20% of all single-family transactions in California entail non-principal residences. “The small family rental, in fact, is the quintessential small investment here--houses normally in the $105,000-$110,000 range, he said.”

With the rate on federal obligations currently running at about 11 1/2%--down, happily, from the 12.59% rate prevailing at the time the CAR first picked up the cudgel a year ago--this means that sellers offering buyers a five-year preferential second trust deed must charge them at least 12.65% or the IRS will impute an interest rate of 13.8%.

It is still an interest rate materially above the average prevailing adjustable rate for second trust deeds among local banks and S&Ls; (10.57%), and has little competitive edge over the average fixed-rate second TD also being offered by banks and S&Ls--12.86;%.

Actually, according to Singer, the measure that the House passed was not really a veto of this provision of the 1984 Deficit Reduction Act, but a modification of the rules with which the industry felt it could live. It would still have exempted principal residences, but have put a cap of $2.8 million on non-principal-residence transactions below which an interest rate of either 9%, or 100% of the applicable federal obligation rate--whichever is lesser--could be levied without penalty. Above $2.8 million, however, the IRS’s rule calling for at least 100% of the applicable federal obligation rate would apply.

Thanks to the body-blocking in the Senate by Sen. Howard M. Metzenbaum (D-Ohio), the old 110%-120% rule still applies, Singer said, “but when Congress reconvenes after Labor Day, we fully expect the Senate to act on it favorably and make it retroactive to June 30--it’s already been approved by the conference committee so we don’t see any obstacle to it. I normally hate to bet on congressional action on anything, but on this I’m extremely optimistic.”

Almost single-handedly, though, CAR officials say, credit for firing up the battle against the imputed interest measure must go to San Diego realtor, Becky Schwab, last year’s president of the state organization, who refused to be daunted by the complexity of getting the seriousness of the measure down to an understandable, grass roots level.

Taking it on as a personal crusade, Schwab flew repeatedly to Washington to buttonhole members of Congress on the overlooked impact of the imputed interest measure on the small real estate investor.

“In the meantime, however, at least for a month, or so,” Singer added, “anyone putting together a deal involving seller financing that would run contrary to the 1984 law should talk to an attorney to take advantage of the anticipated input when the Senate returns.”