Consumer-Friendly Tax Bills Await Political Wrangling

Tax bills that could benefit thousands of homeowners, sellers and buyers across the country hang in the balance as Congress returns after Labor Day for its final, chaotic month of the session.

Some of the bills would affect the real estate tax system broadly, such as proposals raising the limits for capital gains savings on home sale profits. Others would only touch specific segments, such as buyers who fix up homes in local historic districts or owners who fall behind on their mortgage payments.

Given the time pressures--and election-year riptide currents--only a few of the pending proposals have a real shot at passing Congress and being signed into law by President Clinton. Here’s a quick overview of which bills have the best chances of survival, and which appear to be going nowhere:

* Bipartisan Best Shots: A new tax credit for home renovators and the elimination of a controversial penalty for homeowners in mortgage trouble have the best odds of making it through the legislative meat-grinder on Capitol Hill. Bear in mind, however, that even wildly popular proposals could fall victim to this season’s political blood sports. The president could easily end up vetoing proposals he supports because they’ve been pasted onto major bills he opposes.

The Mortgage Cancellation Relief Act, which has passed the House and is awaiting final action in the Senate, is probably the best example. Pushed by influential, bipartisan sponsors in both houses, the bill would end the long-standing penalty in the federal tax code for homeowners who fall behind on payments and face imminent foreclosure.

Under current law, defaulting homeowners who try to “work out” their mortgage problems as an alternative to foreclosure, and receive forgiveness of a portion of their principal debt by their lender, often end up with a tax bill from the government. Any amount of home mortgage debt forgiven by a lender is treated as ordinary income under the tax code, subject to full income tax rates.

The net effect of this penalty is that financially strapped homeowners who avoid the horrors of foreclosure frequently are surprised when the IRS demands taxes on money they don’t have. For example, if your mortgage lender forgives the $20,000 difference between the sale proceeds of your house and the outstanding balance on your mortgage, guess what? You owe the IRS income taxes on the forgiven $20,000.

The bill pending in the Senate would provide an exception to this rule on any amount a lender forgives a borrower on the sale of a principal home, provided the sale proceeds are insufficient to pay off the loan balance.

Another consumer-friendly tax bill with a good chance of passage: A new tax credit for owners who fix up and live in homes located in moderate-income historic districts. The tax credit would be as large as $20,000--up to 20% of the total renovation expenses--and would benefit neighborhoods in large and small communities designated as having historic significance by state or federal authorities.

“This is not designed to be of use in high-cost historic neighborhoods,” says Gordon Kerr, congressional relations director for the National Trust for Historic Preservation, a key proponent of the bill. To qualify, the historic district must not have a median household income more than twice the statewide median income.

Tax credits, unlike deductions, are dollar-for-dollar reductions off your federal tax bill. The Historic Homeownership Assistance Act passed the House, 394 to 27, and has 39 bipartisan co-sponsors in the Senate, led by Sens. Lincoln Chafee (R-R.I.) and Bob Graham (D-Fla.). It is also included in a major community renewal tax package supported by Sen. Chuck Robb, D-Va., and endorsed by the White House.

* Long Shots or Worse: A variety of other pro-homeowner, pro-consumer tax bills are either twisting in the wind, going nowhere or virtually dead already.

Among those with little chance of surviving this month are proposals to index homeowner capital gains exclusions to the rate of inflation. The current $250,000 and $500,000 exclusions for home sale capital gains by single and married sellers, respectively, are frozen into the tax code. They do not keep pace with inflation. A bill by Rep. Rob Andrews, D-N.J., and a budget proposal by Clinton this year, would tie the limits to the consumer price index, and allow them to float upward with inflation.

Other home real estate concepts going nowhere: A Clinton proposal for $2,000 tax credits for buyers of “highly energy-efficient” new homes, and a proposal by the president to tax income earned by homeowners who rent out their house for less than 15 days during the year. Such income currently is tax-free.

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Distributed by the Washington Post Writers Group.