Real estate has plenty at stake -- more than is widely recognized -- in the current hot debate here over whether there's to be a tax cut in 1980.
The major tax cut proposals now being bandied about on Capitol Hill contain some important reforms that could assist housing and real estate significantly.
Take the bill that the Senate Finance Committee passed with strong bipartisan support, for example. It would liberalize the capital gains tax and make ownership of real estate an even more attractive hedge against inflation than it is now.
The bill would increase the tax-free "exclusion" permitted under the capital gain levy to 70 percent of the total gain, up from 60 percent at present.
That means that an owner of a piece of real estate held for a year or more could keep $700 of every $1,000 in profits at resale absolutely tax-free. The remaining $300 of every $1,000 would be included in the taxpayer's regular income and taxed at ordinary rates.
(By the way, this wouldn't change the already favorable rules on capital gains deferral on sales of principal residences. That provision allows you to "roll over" or postpone tax recognition of the gain on the sale of your house, as long as you purchase a more expensive existing dwelling within 18 months or construct a more expensive new one within 24 months.
The Senate Finance Committee's bill -- which is opposed by the Carter administration and hasn't yet come to the Senate floor for a final vote -- would help in two other important ways. It would:
1. Increase savings deposit inflows to thrift institutions by expanding the availability of Individual Retirement Accounts (IRAs) to more U.S. workers, and by enlarging the annual amount of contributions permitted to such pension plans. Deposit flows to thrift institutions like savings and loans and mutual savings banks are crucial to housing. The thrifts provide more dollars for mortgage loans than any other source. The more IRA dollars they've got on deposit, the better off housing will be.
2. Simplify and speed up the depreciation schedules allowed for writeoffs on all real estate, thereby encouraging rental housing construction and investment in new commercial buildings. Most income-producing real estate could be depreciated over 20-year periods under the bill, rather than the cumbersome and audit-prone 30-to 40-year schedules required by the present tax code. Low-income rental real estate could be depreciated in just 15 years, as could owner-occupied business real estate.
Besides the Finance Committee bill, there is another major tax proposal that could help shape the Senate's final measure, via floor amendments. It is a bill, sponsored by Sen. Harrison Williams (D-N.J.), that contains several reforms of special note.
Williams' bill would encourage the owners of apartment buildings that are ripe for conversion to condominiums or cooperatives to sell units directly to tenant organization members at large price discounts. This would be achieved by allowing building owners to qualify for capital gains treatment on their profits from indivudual unit sales, instead of facing ordinary income taxation at present.
Rather than being forced by the tax code to sell a building to a middleman "converter" or developer -- thereby inflating the eventual retail price to consumers -- Williams' bill would permit retail building owners to function as retailers themselves. With mandatory heavy involvement by tenants in the timing and planning of the redevlopment project, building owners could convert an apartment complex into ownership units at deep discount prices.
Sen. Williams, a Democratic liberal with strong ties to the labor movement, is not pushing this concept because he loves fat-cat real estate investors and landlords. Williams has concluded that in a highly inflationary economy, condominium and co-op conversions are inevitable. They're a natural, understandable response to an economic system that penalizes renters as well as the people who own large-scale rental property.
Far better to create incentives for current building owners to sell apartment units at moderate prices, affordable by a large segment of tenants and prospective home buyers, than to try to ban conversions and turn back the clock.
What's the outlook for enactment of sensible tax assistance like this for housing and other real estate? For 1980, the ball is in the court of the Democratic leadership in the House and Senate. Members of their party -- such as Louisiana's Sen. Russell Long, New Jersey's Williams and Texas' Sen. Bentsen -- have seized back much of the initiative from the Republicans on the whole tax cut issue.
But they've still got to convince their colleague down on Pennsylvania Avenue, plus the Ways and Means Committee in the House, to go along and cut some taxes before time runs out.