Home Sellers Are Waiting Until November to Exhale

Nathan Cohen would like to sell his house. But he’s going to wait until November--and possibly longer--to see if either major presidential candidate keeps his campaign promises.

In the past several weeks, President Clinton and Republican candidate Bob Dole have promised to cut capital gains taxes on homes if elected. Either of the proposals could save Cohen thousands of dollars. And Cohen--along with many others, particularly in pricey residential enclaves in Orange County and elsewhere in Southern California--are so convinced these promises are serious that they’re willing to bank on it by sitting on their “For Sale” signs until after the election.

“There are lots of people, including myself, who have substantial gains, but the tax is so prohibitive that they are waiting for it to be reduced to sell,” says Cohen, a 67-year-old who wistfully discusses selling his expansive Montecito home and moving to Palm Springs.

“Now that the kids are grown, we’d like to move into a smaller house, but we’re holding off to see how this plays out,” he said. “I’m hoping that no matter who gets in [the White House], there will be some capital gains relief coming.”

He’s not alone.

Shiva Ommi, a real estate agent with Century 21 Professionals in Irvine, said about 100 people have told her, “If anything happens to the capital gains, we’re going to sell our home.”

For the first time in years, tax accountants say, the prospect of a tax cut on the sale of real estate is so realistic that they are advising their clients to wait for it.

“Assuming you’re not under some other pressure to sell, I would definitely hold off,” said Gregg Ritchie, partner in the personal financial planning group at accounting firm KPMG Peat Marwick. “This is an easy one. [The tax cut] doesn’t cost much. It helps people. And both parties can jump on the bandwagon.”

*

Under current law, you can shelter gains on residential real estate from taxes only if you buy another house of equal or greater value. However, those older than 55 get a one-time tax exclusion of $125,000 when they sell their personal residence.

Those who are younger and who don’t buy another home, or who buy a less expensive house, end up paying tax on their gain at a maximum federal tax rate of 28%.

Both candidates have proposed to dramatically cut the federal tax bite on the sale of appreciated residential real estate. However, they’ve gone at it in different ways.

Dole proposes to slash the federal tax rate on all capital gains--including gains on stocks, bonds and real estate--in half, to a maximum rate of 14%.

Clinton proposes to give every homeowner the right to shelter up to $250,000 in real estate gains from tax when selling a personal residence. Married couples would get a $500,000 tax exclusion. This exclusion would not be contingent on buying a bigger house--or buying a house at all.

The seller could trade down or invest cash elsewhere and still exclude the gain--up to the set limits--from tax. However, taxpayers couldn’t claim this exclusion more than once every two years, said Mark Luscombe, principal analyst at CCH Inc., a Riverwoods, Ill.-based publisher of tax information.

Both candidates’ proposals would benefit so-called empty nesters such as Cohen. But they would also help people who have divorced, transferred to cities or states where real estate prices are lower, or who have simply hit difficult economic times and would like to trade down or get out.

Consider Irvine homeowner Sherril Nixon, who moved from Colorado last year. If capital gains rates had been lower, she would have bought a smaller house and used the cash to invest in mutual funds, she said. But she felt compelled to buy a more expensive home that allowed her to roll over the gain and avoid the tax.

Still, she wonders what would have happened to her investments if she had plunked part of that cash into her “lucky” mutual fund that returned 35% last year.

“Whatever you put into a house now will appreciate at 4% to 6% a year, so why would you buy a house?” she asked.

However, Clinton’s proposal would not help people with rental properties, commercial real estate or stocks and bonds that have gained value. Dole’s proposal would. However, it is seen as a long shot, mainly because Dole is currently running substantially behind in the polls.

“If the election went to Dole and [Jack] Kemp, a capital gains reduction is an absolute sure thing,” said Arthur Hall, senior economist at the Tax Foundation, a nonprofit, nonpartisan tax research group in Washington. “This is something that the Republicans have wanted for years. And they believe in their hearts it will be a revenue gainer--at least for the first several years--because you get this unlocking effect.”

Still, Philip J. Holthouse, partner in the Los Angeles tax firm of Holthouse Carlin & Van Trigt, said: “If you believe the polls, Clinton is going to get reelected. My concern is that he will continue to play the class-warfare game and fight a broad-based capital gains cut on the theory that it mainly helps the wealthy.”

*

Nevertheless, with seemingly serious tax-cut proposals in the offing, many people seem content to wait.

Jason Hartman, an Orange County real estate broker who handles leasing services for absentee landlords, says 20 of his clients have said they would like to sell their rental properties, but won’t--partly because of capital gains.

Hartman, who also owns a rental property, adds: “I’d love to sell it. There are thousands of people out there who like not to own rental property.”

If the capital gains rate drops, he plans to sell.

Kenneth Blaisdell, partner in Smith Liden & Basso, a Newport Beach accounting firm, said he also has numerous clients who would like to unload multimillion-dollar properties, including a client who owns a 50,000-square-foot commercial building in Anaheim and another who has a 400-acre citrus ranch in Northern California. They, too, are holding off, hoping for a capital gains cut.

Cohen adds that he owns a quite a few stocks and a couple of rental properties that he would like to unload too. He’s voting for Dole, but hopes that Clinton will jump on the capital gains bandwagon and come up with a broad-based cut if he wins reelection.

Still, not everyone is convinced by the election year promises.

Some high-end property owners think they are as likely to be squeezed by a new tax law as they are to be helped, said Patricia J. Foerster, a realty agent who works primarily with wealthy homeowners.

“We know how tax bills work,” said Foerster, vice president and general manager at Coldwell Banker in Newport Beach. “[Politicians] talk, but when it comes down to it, they give and also take away.”