Homeowners May Win New Tax Relief in 1997

Besides capital gains relief on the profits when they sell their residences, American homeowners can look forward to several other tax-related benefits that probably will flow from the Republican-controlled 105th Congress that convenes in January.

The capital gains planks of both parties have been widely publicized since last summer’s campaign conventions. Both proposals would allow owners to pocket up to $250,000 of home sale gain (for singles) or $500,000 (for joint filers), tax-free.

The legislative agenda for other items that affect home buyers and sellers has received little or no attention. So you know in advance what’s on Capitol Hill’s drawing board for 1997, here’s a quick tax update based on discussions with congressional staff members:

* Tax relief for owners who incur losses when they sell their houses. Advocated for years by Rep. Bill Archer (R-Texas), now the chairman of the powerful tax-writing Ways and Means Committee, the home sale loss concept is a good bet for inclusion in the first major tax bill to move from the committee.

It would be of help to thousands of homeowners in areas of the country that have experienced wide fluctuations in real estate values during recent years--particularly in the Northeast, California and Texas.

Here’s how Archer’s plan would work: Under current law, when you sell a house for a big loss because the local market cratered, you get no tax relief. That’s because losses on home sales don’t count as capital losses for federal tax purposes.

Lose $30,000 on a home sale and you can’t deduct it against anything. Lose $30,000 on stocks and you can write it off against whatever capital gains you’ve had in the same year. You can also take up to $3,000 of such capital losses per year and write them off against regular income from your salary. You can’t do that with home sale losses.

That would change under the Archer plan. You’d be able to treat your home sale losses as capital losses. Say, for example, you lost $20,000 on the sale of your house. In the same year, you happen to have capital gains of $10,000 from the sale of stock.

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Under the bill, you could zero out the taxes due on the stock sale gains, using $10,000 of your $20,000 of home sale losses. You could also write off $3,000 against ordinary income, leaving you with $7,000 in capital losses to roll over into future tax years.

* Retirement-fund reform for first-time home purchase down payments. Just as Ways and Means Chairman Archer has pushed capital loss relief for years, so has his Senate counterpart, Sen. William V. Roth (R-Del.), chairman of the Finance Committee, advocated opening up individual retirement accounts for penalty-free down payment assistance to new buyers.

Roth is virtually certain to reintroduce his plan from the 104th Congress that would allow parents or grandparents to tap their retirement accounts--IRAs and 401(k) employee benefit plans--to help their children or grandchildren make a first down payment. Under current law, a withdrawal from an IRA for such a gift would incur a 10% penalty tax on top of income tax.

If Roth’s program makes it through Congress in the new session, tax-assisted cross-generational down payment gifts--or loans--for home buyers could become widespread among baby boomers and their upcoming generation of first-time purchasers. Watch, though, for the House or even the Clinton administration to push for less-sweeping IRA reforms than those pushed by Roth.

House Republicans may prefer a plan that would not allow IRA-tapping for cross-generational down payments but would allow buyers penalty-free use of their retirement accounts for their own home purchases.

Since the heftiest retirement accounts tend to be in the hands of older workers, such a plan probably wouldn’t be of much use to typically young first-timers trying to scrape together money for a down payment.

* Elimination of the “tainted spouse” and other real estate tax code anomalies. If a compromise version of the Dole-Clinton capital gains proposal passes Congress, it’s certain to jettison a variety of complicated, and widely misunderstood, tax code provisions that have dogged homeowners for years.

These include the penalizing of divorced or widowed spouses who have already used the $125,000 one-time tax-free exclusion of gains for sellers 55 years and older and then marry a homeowner who hasn’t.

Under current law, the individual who’s made use of the exclusion is forever tainted--like Hawthorne’s Hester Prynne--and any subsequent spouse cannot use the exclusion while married to the tainted taxpayer.

Distributed by the Washington Post Writers Group.