Tax Law Change Gives Boost to Home Sales
Call it the $6-billion-a-year campaign giveaway. Call it the best thing Congress has done for the nation’s homeowners this century. Call it the Baby Boomer Relief Act.
Whatever you call it, it’s working. Barely two years after taking effect, the sweeping federal tax reforms allowing home sellers to pocket $250,000 to $500,000 worth of sale profits tax-free are beginning to change property owners’ behavior--and are filling their bank accounts with cash.
Interviews with real estate professionals in major markets around the country suggest that the capital gains changes enacted by Congress in 1996 have helped push home resales to record levels, are encouraging some empty-nesters to downsize their housing earlier than planned, and may be stimulating interest among some couples to move back to the city from the suburbs.
Although he emphasized that no formal studies have been conducted, Frederick E. Flick, research chief for the National Assn. of Realtors, says it’s “highly likely” that the tax changes “are encouraging some people to sell [their homes] who otherwise wouldn’t” and that the stimulus could have influenced anywhere from 100,000 to 500,000 of 1998’s record 4.8 million resales.
The highest numbers of resales before 1996 were 3.99 million in 1978 and 3.94 million in 1994. In 1995, the year before the tax law passed, 3.8 million homes were resold.
Other factors, including the booming economy and low mortgage rates, have played major roles in recent high resale volumes, according to Flick and other analysts.
But real estate sales executives in some markets insist the tax changes are having significant effects on certain owners, especially baby boomers.
For example, Robert Gayle, a Los Angeles sales manager for one of California’s largest realty brokerages, Fred Sands Superior Brokers, said his firm regularly lists and sells houses for couples in their 50s and older who clearly are motivated by the $250,000 to $500,000 tax-free changes.
In one recent case, said Gayle, a husband and wife told him that they had hesitated to sell their $600,000-plus home because they feared the combined federal-state capital gains tax would gobble up much of their proceeds, leaving them with little cash.
But in the wake of the law change, they have been free to sell, buy a smaller house for cash and sock away the balance for retirement. The couple, said Gayle, recently downsized to a $250,000 home with fewer bedrooms and a smaller lot and put more than $200,000 in the bank.
“There’s no question that the [tax law] change motivated them,” Gayle said. “They were quite open about it.”
In Cleveland, Barbara Reynolds, the senior vice president who supervises sales in the 45 branch offices of Realty One Inc., Ohio’s largest brokerage, says, “I hear it on the street every day that people who would have waited another five or six years” before moving now are selling early to take advantage of the capital gains changes.
Some of these sellers are heading back into Cleveland from the suburbs, she said, fueling Cleveland’s urban revival.
In Clearwater, Fla., Lewis Sticco, chief financial officer of the state’s largest real estate brokerage, Prudential Florida Realty, says tax-motivated buyers in the 35-to-50 age bracket from Northern states are selling family homes in Connecticut, Massachusetts and New York. Then they’re pumping the cash they pocket into red-hot Florida markets like Naples and Boca Raton-Fort Lauderdale.
In Washington, D.C., where the in-town housing market is beginning to surge, Wesley Foster, the head of the country’s third-largest independent realty company, Long & Foster Real Estate Inc., says the back-to-the-city movement is being stimulated in part by the tax change.
But Foster says the trend his company sees “isn’t necessarily downsizing” by empty-nesters using tax-free gains but “buying up again.” Rather than opting for less luxurious units than they had in the suburbs, some are buying pricey places closer in, where cultural attractions are more convenient.
All of this anecdotal evidence should please the two politicians who called for drastically streamlining home sales taxation in the last presidential campaign--President Clinton and Bob Dole.
Both candidates proposed scrapping the long-standing “rollover” provision of previous tax law, which encouraged homeowners to roll gains tax-deferred into successively larger homes until they reach 55, at which point they could pocket $125,000 of their profits and pay capital gains taxes on everything above that.
Both candidates emphasized that the cost to the tax system of the streamlining would be modest. The actual cost, at least as measured in new estimates by the congressional Joint Tax Committee, turns out to be substantial: About $31 billion over the next five years.
For home sellers, at least, that’s a bipartisan $6 billion a year they’d never be able to pocket if they paid capital gains taxes on their profits.
Distributed by the Washington Post Writers Group.
