YOUR MORTGAGE : Planning, Luck Needed to Reap Benefits

President Bush’s plan to provide generous tax breaks to new home-buyers and other real-estate investors will sail through Congress and could be made even sweeter by federal legislators, many lobbyists and other experts say.

But buyers who are looking for homes now--or those who expect to start house-hunting in spring, the prime-home-buying season--will need a combination of planning and good luck to reap all the benefits of the tax changes that Bush has proposed.

“We like most of the President’s proposals, but you have to remember that they’re not etched in stone,” said Steven Driesler, chief lobbyist for the National Assn. of Realtors.

“Frankly, I think that Congress might improve on this package. But for the typical buyer or seller, it’s a little bit of a crapshoot at this point.”

In last month’s State of the Union address, Bush called for a $5,000 tax credit for first-time buyers, a halving of the taxes that real-estate investors and others must pay on resale profits, and penalty-free withdrawals of up to $10,000 from retirement accounts as long as the money is used to buy a house.

He also called for a slight loosening of the controversial “passive-loss” rules that affect investors in rental property, and special tax breaks for homeowners who sell their house at a loss.

Bush challenged Congress to pass his proposals by March 20, and make them retroactive to Feb. 1.

And in a novel effort to “jump start” the sluggish economy, the President proposed that many of these tax breaks--including the $5,000 credit for first-time buyers--disappear at the end of the year.

“The President is basically trying to create a ‘window of opportunity’ for home buyers, but threatening to slam it shut if they don’t act by the end of the year,” said one real estate lobbyist.

While many housing experts have praised the Bush plan, they also say that it has left many buyers and sellers in a quandary:

Should you buy or sell a house now and hope that Congress goes along with the package? Or should you play it safe and stay on the sidelines until the bill’s chances of passage come clearer into focus?

First-time buyers who are hoping that the Bush plan succeeds so they can tap their retirement accounts to purchase a home must be especially wary, experts say.

The Bush proposal would allow first-timers to pull up to $10,000 out of their individual retirement account and avoid paying the standard 10% early-withdrawal penalty as long as the cash is used to purchase a home.

But buyers who make their withdrawals today could face a huge tax bill next year if Congress doesn’t go along with Bush’s plans.

“If you pull out $10,000 and Congress kills the bill, you’ll get hit with a $1,000 (10%) penalty and also have to pay taxes on the money,” summed up Lawrence A. Krause, president of the San Francisco-based financial planning firm that bears his name.

Buyers in high-priced states such as California and New York may have another reason to stay on the home-buying sidelines, Krause said.

That’s because other bills currently in front of Congress--including one authored by Lloyd Bentsen, the influential senator from Texas--would allow unlimited, penalty-free withdrawals from IRAs and other types of accounts for first-time buyers.

While the President’s proposal to let people take out $10,000 in penalty-free cash would provide buyers in low-cost housing states a sizable down payment, it wouldn’t amount to much in California and many other coastal areas where prices are much higher.

For example, consider a Californian who wants to buy the state’s median-priced home of $209,000. If he wanted to make the standard down payment of 20%, he’d need about $40,000.

If he was fortunate enough to have $40,000 tucked away in a qualified retirement account and the Bentsen proposal passed, he’d be able to pull the money out without paying the $4,000 ($40,000 x 10%) penalty.

But if the Bush proposal prevails, he’d only avoid paying $1,000 in penalties. The remaining $30,000 of the withdrawal would likely be subject to $3,000 in penalties.

Some real estate experts see other shortcomings in the President’s housing proposal:

* The $5,000 tax credit would be spread out over two years, meaning that buyers wouldn’t see any real savings until they filed their 1992 tax returns next year.

“We’re hoping that Congress can figure out a way to ‘front-load’ the credit so (would-be) buyers could access the cash right away,” said Chuck Lamb, a Los Angeles realtor and president of the California Assn. of Realtors.

* While the President’s plan would slash the capital-gains tax that most investors must pay from a maximum 28% to a maximum 15.4%, investors would also have to “recapture” their depreciation write-offs and pay taxes on them.

This little-publicized, highly technical proposal would actually wind up costing most real estate investors more money than they’d pay if they sold their rental property today, many trade groups say.

* Although Bush called for a loosening of the tax laws that limit “passive-loss” deductions for real estate investors who lose money, the actual wording of the proposal would limit the relief only to “developers” who can meet certain guidelines.

Again, most real estate investors--including the majority of small, “mom-and-pop” investors--wouldn’t be eligible for the bigger tax breaks.

Realtor Lamb said business at his three Century 21 offices in the San Fernando Valley doubled shortly after Bush made his housing plans public.

But financial planner Krause said safety-conscious buyers might want to keep their wallets in their pockets until they see how the President’s plan fares on Capitol Hill.

“If prices were going up 5% or 10% a month, I might be inclined to go ahead and buy now, hoping that I’d get to take the tax deductions later,” Krause said.

“But with prices barely moving, there’s really no reason to rush out and buy a house.”