PREVIEWING THE BUSH BUDGET : Real Estate Industry Stands to Win Big : * Economy: Incentives to first-time buyers, to some in the housing market and to investors could revive the ailing sector.
The real estate industry--which typically leads the nation out of recession--could emerge as a big winner in President Bush’s proposed budget to be unveiled today as he offers tax incentives to first-time home buyers, to some already in the housing market and to real estate professionals and investors.
The wide-ranging proposals are designed to give a financial boost to the ailing real estate industry, which has been hurt by slumping sales, sagging construction and a glut of commercial office space in the nation’s cities and suburbs. Many economists feel that a recovery cannot begin without a strong real estate engine.
“Real estate has led our economy out of all the tough times we’ve ever had,” the President said in his State of the Union address Tuesday night. “Once building starts, carpenters and plumbers work and people buy homes and take out mortgages.”
Bush will propose offering first-time home buyers a double dose of financial aid: a $5,000 tax credit and allowing the withdrawal of up to $10,000 (up to $20,000 for a couple) from individual retirement accounts, or IRAs, without penalty if the money is used for a down payment.
There’s also something for those already in the housing game who lost money in the real estate slump of recent years. The President will propose a new tax deduction for losses on the sale of a home.
For developers and other professionals in the real estate business, the President will seek changes in tax rules that limit the deduction of losses from real estate against profits from other sources of income for tax purposes. This so-called passive-loss deduction is aimed at driving up the resale value of office buildings and shopping centers.
The President also called for a change in the laws on pension fund activities to make it easier for the cash-rich funds to invest in commercial real estate. Currently, there are comparatively tight restrictions on the types of investments permitted to pension funds. Such a change could ease the credit crunch by freeing up new funding for building.
The industry, which has campaigned for three years for a change in the tax code, hailed the speech.
“This is very good news,” said Malcolm Riley of Riley/Pearlman, a Los Angeles firm that develops shopping centers. “The real estate industry has lobbied long and hard and, at times, frustratingly” to get a change in the law to permit people in the business to deduct their real estate losses against other income, noted Riely, who is president of the International Council of Shopping Centers.
The package of real estate proposals, which Bush asked to be enacted by March 20, “will help stop the slide in real estate,” the White House said in a fact sheet on the growth package.
“We recognize that real estate is a big problem in the economy--after all, the average American has 45% of his net worth in his home,” a top Administration official said Tuesday, explaining why the growth package puts such heavy emphasis on reviving real estate values.
The number of first-time buyers could be increased by at least 250,000 if the Administration plan is adopted, officials estimated. The President said his proposal would help “those Americans who dream of buying a first home but who can’t quite afford it.”
First-time buyers would get a tax credit equal to 10% of the purchase price of a home, up to a maximum of $5,000, for homes purchased between Feb. 1 and Dec. 31. The credit reduces a person’s tax bill on a dollar-for-dollar basis. If someone owes $3,000, and has a $2,000 credit, the final bill to the Internal Revenue Service will be $1,000.
The credit would be available to any first-time buyer--defined as someone who did not own a home in the past three years.
A first-time buyer also could withdraw up to $10,000 from an IRA without penalty and use the money to help with the purchase price. A married couple could withdraw $20,000.
Currently, a person who takes money out of an IRA account before the age of 59 1/2 must pay taxes on the money and an additional 10% penalty. The penalty would be waived for the home buyer.
The proposal to allow deductions on the losses from the sale of single-family homes could provide a boost to areas where housing prices have fallen sharply in recent years. The tax write-off could make such a sale more palatable to some homeowners.
Taxpayers now can deduct losses, caused by such things as fire and theft, in excess of 10% of their income. Losses on a home sale would be eligible on the same basis. Thus, a person with income of $50,000, and a $10,000 loss, could deduct $5,000.
The change in the “passive loss” rules, if approved by Congress, could increase prices, particularly of commercial properties in areas with high vacancy rates or large inventories owned by the federal government. The deduction is only for individuals whose primary livelihood is in real estate.
The Administration hopes to free up the money in pension funds for large scale investment in real estate. The pension funds have been under strict “prudent investment” rules limiting them in large part to highly conservative investments in securities. The Administration will push for amendments in the labor laws to change the definition of prudent investments and make it possible for pension funds to expand significantly into real estate.
The home building industry, which suffered in 1991 through the worst year for new housing starts since World War II, would likely gain significant numbers of new customers under the President’s plan.
“It’s going to be an incredible shot in the arm for the home building industry . . . But it’s much less promising for commercial real estate, where the basic problem is not a shortage of capital but a shortage of tenants” for office buildings, said James Z. Pugash, director of the Montgomery Securities Real Estate investment firm in San Francisco.
Ira Norris, president of Inco Homes in Upland, was more reserved, saying, “It’s not going to put us in immediate boom times; we still have cautious lenders and widespread layoffs.”
Times staff writer Jube Shiver in Los Angeles contributed to this story.
* MAIN STORY: A1
