YOUR MORTGAGE : Senate Shift Could Be a Boon to Homeowners
The prospects for significant new tax benefits for home buyers and owners brightened recently on Capitol Hill. But investors in income-producing real estate--ranging from small rental houses to downtown office towers--could face a new worry: To balance the federal budget, the Senate could hit them with an unexpected new tax levy.
Here’s what’s happening:
The abrupt, dramatic change in the chairmanship of the Senate Finance Committee caused by the resignation of Sen. Bob Packwood (R-Ore.) has important ramifications for housing. The new chairman, Sen. William V. Roth (R-Del.), is a longtime advocate of expanding homeownership through selective changes in the federal tax code and banking laws.
By contrast, Packwood, whose resignation from the Senate takes effect Oct. 1, has called for cutbacks in the home mortgage interest deduction and personally authored the controversial “passive loss” system for rental real estate in the Tax Reform Act of 1986. The passive loss concept generally prevents owners of rental real estate from writing off losses incurred by their properties against their regular income.
Although congressional tax experts caution against expecting radical alterations in the shape of the Senate’s 1995 tax legislation, they agree that housing policy may be one area where Roth’s presence as chairman makes a real difference.
Since spring, Roth has pushed this year’s most generous Individual Retirement Account reform bill for new home buyers--one that goes well beyond even the American Dream Savings Account passed by the House as part of the Republican “contract with America.” Roth’s plan is co-sponsored by Sen. John B. Breaux (D-La.).
The new House program would allow you to put aside up to $2,000 ($4,000 for a married couple) into a new “dream account.” Five years after establishing the account, you’d be able to tap it to withdraw funds needed for a down payment on your first home purchase. Unlike a current IRA, you’d avoid the 10% penalty now levied on withdrawals before the age of 59 1/2.
Roth’s bill takes a sharply different approach--one likely to help far larger numbers of young families come up with down payment cash. Under the Roth-Breaux plan, parents and grandparents could make “cross-generational” penalty-free withdrawals from their own IRAs and 401(k) retirement accounts to help their children or grandchildren with a down payment. Equally important, there would be no five-year waiting period before the funds could flow, nor any dollar limit on the amount of money withdrawn.
Under the Roth-Breaux bill, a parent or grandparent--or a combination of them--could pull out $10,000, $15,000 or more from their retirement accounts and help their kids at the very moment they need it most as new home buyers: When they find the right house but don’t have the savings to swing the down payment and closing costs.
Roth has been advocating the penalty-free use of retirement funds for first-time home purchases since the 1980s but has never been in the political position to have the concept get the consideration he believes it deserves. As one Capitol Hill tax staffer put it, “You can be certain it gets consideration this time around.”
Another important change Roth brings to the chairmanship: Unlike Packwood, he is an outspoken advocate of capital gains tax relief for real estate and other assets. Though he is expected to take his cues on this--and most other major issues--from Senate Majority Leader Bob Dole (R-Kan.), the committee is considered likely to support some form of relief like the House-passed tax bill. Under that plan, the current 28% capital gains tax rate ceiling would be scrapped. Instead, the first 50% of gains on a capital asset would be excluded from tax liability for individual taxpayers. Your tax rate on regular income would apply to the other half of your gains.
For many owners of residential real estate, this would amount to a very attractive tax break. Even the highest taxed individuals--those in the 39.6% marginal bracket--would pay no higher than 19.8% on real estate gains, compared to 28% today.
Such tax breaks, however, could cost the federal treasury billions, making it tougher to balance the budget by the Republicans’ target date of 2002. To cut the revenue losses, Senate Finance Committee staff reportedly is considering hitting real estate investors with a new levy: “recapture” of depreciation deductions at a rate higher than the new capital gains rate--perhaps as high as the top regular income tax rate of 39.6%.
To illustrate: If you had written off $40,000 for depreciation on a property during your ownership and you sold the building for a $100,000 capital gain, $40,000 of your gain could be taxed as high as 39.6%. The other $60,000 would be taxed at 19.8%. Under the House-passed bill, by contrast, your entire gain would be taxed at the lower rate.
Distributed by the Washington Post Writers Group .
