Congress' most generous tax break for housing -- its decision to allow homeowners 55 years or older to take up to $100,000 in profits tax-free from the sale of their residence -- is beginning to have significant effects in real estate markets around the country.
Although data on federal tax returns for the first full year of the provision won't be available for months, real estate brokers in key metropolitan areas report that large numbers of homeowners are taking advantage of the law.
Couples or individuals, formerly afraid to sell their homes because of the huge capital gains taxes they'd have to pay on their inflated profits, have jumped into the market. Many of them have sold large houses -- opening up properties for younger, growing families who need the room -- and have put their tax-free cash into condominiums, small homes, Sun Belt retirement properties, gold and investment real estate.
Some of them are anxious to use the provision as soon as they qualify because they worry that a budget-conscious Congress could change its mind and rescind the law.
The $100,000 homeowners' "exclusion" was added to the federal tax code by the Revenue Act of 1978. The Internal Revenue Service didn't publish final regulations on the mechanics of the law until late April 1979, and accountants and homeowners were reluctant to file claims before seeing the official rules.
Under prior tax law, homeowners received no age-related breaks until they reached 65 years. Then they could take the first $35,000 of the gain on their personal residences and be taxed on profits above that amount according to an ascending scale.
Homeowners who had purchased properties at low prices, held them for years and watched them appreciate rapidly during the past 15 years, were taxed especially heavily under the law. Their after-tax proceeds were often inadequate to buy or rent housing anywhere near their former level of quality, thanks to the very inflation that pushed up their tax bracket.
The net effect of the law was to delay retirements and keep older homeowners in houses more suitable for families with children.
The 1978 amendments to the tax code liberalized all this by permitting homeowners 55 years or older to sell their personal residences with no captial gains levy on the first $100,000 of profits. The law restricts the one-time-only exclusion to those who have occupied their homes for at least three of the past five years.
Early response to the law change in selected major markets has been dramatic. Suburban Chicago realty broker Larry Goulet, sales manager of the Evanston office of Quinlan and Tyson Inc., says that the $100,000 concept "has turned a lot of reluctant owners into sellers. It's really broken the ice."
Goulet, whose firm did $300 million in sales through 16 Chicago area offices last year, recounts stories of executives who pulled up stakes and moved to Florida -- "solely because they could now take their real estate appreciation along with them, tax-free." Goulet said one client took the full $100,000 gain, put it immediately into high-yielding money funds, and rented an apartment.
Another client, who had been eager to sell his home for years but had refused because of the tax bite, sold immediately, retired and headed south.
Realtors in suburban Boston, Washington, Kansas City and other markets report similar patterns, particularly with prime, older houses in middle-to-upper-income neighborhoods.
Boston area broker Samuel J. McDonald, whose firm specializes in sales in suburbs like Weston and Wellesley, says the new law "is functioning as a tremendous financial stimulant" for people who otherwise felt trapped in their homes of many years.
McDonald's clients have bought condominiums in the city, small suburban homes, invested in income-producing real estate, or moved to Cape Cod, Arizona or other recreation-oriented areas.
Homeowners themselves make no bones about the attractions of the new tax break. One Washington business-woman and homeowner, Maye Rosenthal, says many of her firends in their early and mid-50s "have either sold their homes with the (new law) in mind, or are planning to do it as soon as they qualify."
Rosenthal and her husband recently sold their Chevy Chase home for $145,000, 14 years after they purchased it for $37,000. The difference in federal taxes owed under the new law compared with the former law "is absolutely delightful," she said.
She and her husband are putting part of their proceeds into small-scale investment real estate in the Washington-Baltimore area.