The 1983 tax-legislation season is about to begin on Capitol Hill, and real estate owners and investors across the country could find themselves on this year's revenue-raising list. You're already on one Congressional Budget Office hit list, in fact, if you fit into any of the following categories:
You're a homeowner who plans to resell your house and defer taxation on your profits by buying a new, more costly property.
You own or invest in rental apartments or commercial buildings and use the favorable 15-year depreciation schedule created by the 1981 tax act.
You hope to make use of residential energy-conservation tax credits before they expire in 1985.
You're an owner or investor in a building eligible for rehabilitation and preservation via the 20 percent to 25 percent tax credits created by Congress in 1981.
Your combined mortgage interest, auto and other nonbusiness consumer borrowings produce itemized interest deductions of $10,000 a year.
Those are five of 29 revenue-raising options proposed to the House and Senate by the Congressional Budget Office for possible consideration in this year's legislative rounds.
The budget office's options haven't received formal attention yet by the House Ways and Means Committee or the Senate Finance Committee because both sets of lawmakers and staffs have been preoccupied with the emergency Social Security bailout bill. Conferees finished off that package prior to leaving for the Easter recess, however, and the committee will begin work on revenue issues early in April.
Complicating this year's tax picture is the ballooning $200 billion federal budget deficit, plus the banking industry's heavy lobbying campaign aimed at killing the 10 percent interest-withholding provisions of 1982's tax act.
Capitol Hill and Treasury experts say that, if the bankers succeed in knocking out the controversial withholding reforms (and they appear to have the votes to do so on the floors of both the House and Senate), the deficit projections could increase by between $18 billion and $22 billion over the next five years. That, in turn, would increase pressure for a sizable revenue-raising bill on Capitol Hill this year--very possibly one that affects real estate.
"If we've got to plug an even bigger hole than we've got right now"--thanks to the bankers' campaign--"then all bets are off as far as who's going to get hit" by tax increases, said a key staff member of the Ways and Means Committee. "Real estate inevitably will offer tempting places to raise revenue" simply because it enjoys such large tax subsidies under the current federal tax code, the staff member added.
Although a frontal attack on the biggest and most popular subsidies--the deductibility of home-mortgage-interest and property-tax payments--isn't feasible politically, the Ways and Means Committee aide said the Congressional Budget Office's list of options "offers a reasonable idea of where we'd have to look."
Here's a quick overview of the five major real-estate items on that list, including the budget office's economic rationales for changing the code.
Repeal the residential energy tax credits. Homeowners and renters currently can take a credit equal to 15 percent of the first $2,000 they spend on insulation and other energy-co servation improvements. They also can get a 40 percent credit on the first $10,000 spent on certain solar and other "renewable" energy improvements. The budget option paper argues that "there is little evidence thus far that the credits have been effective in promoting energy conservation." Estimated savings: $2 billion in revenues over the next four years.
Limit nonbusiness interest deductions to $10,000. Long a goal of tax reformers, this would prohibit consumers from deducting more than $10,000 a year in nonbusiness interest costs--including those for first and second homes, cars, etc. Estimated savings: $9 billion between 1984 and 1988.
Tax 10 percent of the gain on home sales. The report says that an immediate tax of 10 percent on home-sale profits--rather than the present deferral and the $125,000 tax-free exclusion for older sellers--could raise $4.4 billion in just four years.
Lengthen the depreciation period for rental buildings to 20 years from the current 15 years. The highest profile real-estate target on the hit list, this would raise $19.3 billion by 1988--and hit large numbers of apartment and office-building investors hard.
Eliminate the tax credits for preserving and renovating older buildings. This would raise somewhere between $5 billion and $7 billion, according to the budget office, depending upon whether Congress chose to retain a small tax credit for historic rehabs.