The partisan congressional brouhaha over 1981's tax-cut bill is producing some important gains for anyone interested in real estate.
Whatever final form the legislation takes -- probably late this summer -- one conclusion is now inescapable: Home buyers, sellers, small-scale real estate investors and rehabilitators are going to be winners.
The House and Senate versions of the tax legislation differ in key respects, but the shapes of the likely compromises affecting real estate are clear enough to predict.
Here's a quick rundown on what's coming from Capitol Hill and what it means to you as a property owner or buyer.
In addition to cuts averaging 23 percent to 25 percent over the next three years in your federal income taxes, the legislation is going to help the U.S. mortgage market by helping mortgage lenders attract new savings deposits. The vehicle to do this will be a one-year tax-exempt, federally insured savings certificate carrying interest rates far above current passbook rates.
Rather than keeping savings in a non-insured account with a money market fund, where interest rates are taxable, you may well decide to shift your funds this fall to a tax-exempt certificate at a savings and loan association or a bank. Under the new law, you'll be able to pocket $1,000 to $2,000 of interest tax-free (depending upon whether you file your tax return jointly or as a single taxpayer).
The interest rate on the certificates will be set at a level -- 70 percent of the rate on 12-month Treasury bills -- designed to be attractive to the majority of tax-paying U.S. savings depositors. How much money nationwide would be shifted to the new certificates (estimates range from $50 billion to over $100 billion) and how much would be immediately loaned out for new mortgages are issues still open to debate.
The House Ways and Means Committee wants to tie the certificates directly to mortgage-lending activity by S&L or banks. The Senate prefers to allow lenders a freer hand.
Suffice it to say that the new tax-exempt certificates are likely to reverse the heavy outflows of cash from mortgage lenders and provide billions of new money for mortgages.
That's good news if you're hoping to buy, sell or build a house in the coming year. The new funds also should help promote greater competition inside local mortgage markets. With fresh funds to loan, plus federal authority to use new "adjustable-rate" mortgage plans, lenders could end up competing with one another for your real estate business. That, in turn, could nudge mortgage rates lower and force lenders to offer better terms to consumers than they'd choose to otherwise.
The new tax bill contains other, significant goodies for housing and real estate investment.
For example, small-scale investors who buy rental houses, duplexes or apartments will find life under the forthcoming new depreciation system to be an utter delight compared with the current maze of federal rules.
Under the Ways and Means Committee's legislation which will almost certainly end up in the final law this fall, investment property owners will be able to depreciate their real estate acquisitions in 15 years or use one of several forms of accelerated write-offs, depending upon the type of property.
Rather than fighting incessantly with the Internal Revenue Service over the "economic life" of a rental home or apartment building, investors will be able to take faster, larger, more dependable depreciation deductions -- and not have to worrry as much about Uncle Sam's auditors.
The growing number of small-scale investors across the country who rehabilitate older residential and commercial buildings -- particularly in cities -- also will get a big boost from the tax bill.
For instance, individuals or groups who purchase and rehabilitate buildings 30 years or older will qualify for a 15 percent to 20 percent immediate tax credit on their out-of-pocket expenditures on the initial fix-up of property. That's a generous increase from the current 10 percent credit allowed on "rehab" of buildings 20 years or older.
Investors who buy and renovate properties within locally designated "historic" districts will do even better. They'll get a 25 percent credit and will be able to qualify for rehabilitation of residential property for the first time ever.
That could prove very helpful to the prospects for reviving residential use in many of American's older urban areas. Such areas are filled with under-used real estate that could be converted to rental use.
There are a number of other, less direct incentives for real estate that are likely in the final 1981 tax bill. They range from virtual elimination of the federal estate tax for all but the wealthiest 3 percent of the population to the end of the so-called "marriage penalty" on two-earner households. (The latter reform, by the way, will be worth up to $3,000 in new deductions per year for husband and wife -- money that may very well end up invested in bigger houses or other real estate.)
The forthcoming law, in short, should continue all of real estate's existing tax inventives and add several new sweeteners -- direct and indirect -- to the pot. It will be worth the long wait.