The emotional and highly publicized battle over condominium conversions -- currently being waged on Capitol Hill by groups representing real estate interests on the one side and tenants and the elderly on the other -- is about to take a new twist.
Proponents of a federal crackdown on conversions are on the verge of introducing legislation that would turn the U.S. tax code upside down for condo-unit buyers and developers, and seek to bring conversions to a halt nationwide.
An "anti-condo" legislative package being readied here for introduction the first week in May represents what one congressional aide calls "the only way to bring back some balance to the real estate game: change the rules on the players -- including the bankers, the small-scale investors who ae buying up property like crazy, and the big boys who convert hundreds of units at a time."
The author of the bill is Rep. Benjamin S. Rosenthal (D-N.Y.), whose subcommittee held three days of hearings on condominiums recently and plans a new round early next month. Among the items in Rosenthal's draft package are:
A revision of the U.S. tax code to deny cut-rate capital gains treatment to owners of rental buildings who sell them to anyone for conversion to ownership units -- whether condo or cooperative.
A revision of the tax code to make it profitable for rental property owners to sell their buildings to their own tenants, and thereby keep retail prices of condo or co-op units as low as possible.
An attack on the rapidly growing trend towards speculative purchases of condo units by small-scale investors who rent them out and use them as tax shelters. Rosenthal's draft would deny the normal federal tax deductions for depreciation and other costs to many investors, thereby rendering non-owner occupancy of converted condos far less attractive than under current law.
A 24-month prohibition against any form of lending by federally insured banks, savings and loan associations, and credit unions or their subsidiaries where the funds would be used to convert a rental building into ownership units. The federal moratorium would take effect this year, and would choke off an estimated 80 percent to 90 percent of condominium activity across the country.
Rosenthal and his supporters in the House and Senate concede that the political odds are stacked against anything as extreme as a federal moratorium on conversions. But they think the current widespread interest on Capitol Hill in rationalizing the tax code makes this the right time to push for selective real estate tax reform.
For example, Rosenthal's legislative assistant, Ted Jacobs, the principal draftsman of the upcoming condo package, says he has found strong support in the House for eliminating the "inflationary bias" in the tax code that adds thousands of dollars onto the price of typical converted condo units sold by developers.
Under current law, the owner of an apartment building who wishes to sell their property in the form of condominiums directly to tenants or other home buyers can't do so without suffering a major tax penalty: denial of capital gains treatment on the appreciated value of the building.
If the owner sells the entire building in one transaction, the federal tax on profits goes no higher than 28 perent. If the owner sells units individually -- turning the seller into a real estate "dealer" under the code -- the profits can be taxed at a rate as high as 70 percent.
As a result, the condominium field is dominated by professional middlemen -- developers and real estate promoters who buy rental properties ripe for conversion from investor-owners. The addition of such middlemen to the condominium process inevitably raises the retail price paid per unit by consumers, sometimes by tens of thousands of dollars per apartment beyond what the original owners would have charged had they been able to sell the units directly themselves.
"There's no rhyme or reason for this in an economy that's already overburdened with inflation," Jacobs says. "When condo buyers around the country are paying prices that are padded with costs for middlemen who'd never by doing what they're doing in a more rational tax system, I think it's time for rewriting that part of the system."