From a purely real estate perspective, the Treasury's tax-reform package delivered to President Reagan last week is a Pandora's box.
The shape of the package itself isn't what's important. What pops out of it during the coming six months -- and lands in the patchwork tax bill Congress plans to craft in 1985 -- could affect your pocketbook for years to come.
Treasury Secretary Donald T. Regan's modified flat-tax plan has no chance of enactment in anything resembling its present form. Ask anyone on Capitol Hill, including the new Senate Finance Committee chairman, Sen. Robert Packwood (R-Ore.), who opposes it. Any comprehensive tax-code overhaul is out of the question for next year so far as Packwood is concerned. Because he'd have to shepherd any such changes through the Senate, don't hold your breath for tax simplication on a grand scale.
What Packwood, House Ways and Means Committee Chairman Dan Rostenkowski (D-Ill.) and other leaders are preared to do next year is continue to "reform" the code piecemeal, and raise federal tax revenues in the process.
It is in that context that Donald Regan's package bears bad omens for real estate. Of all the sectors of the economy touched by the Treasury package in its original form, none takes quite the hits that housing and real estate do.
Any one of the 15 major reforms targeted on real estate could affect property values, financing opportunities or investment returns for many Americans. If Regan's aggressive bargaining gambit succeeds -- and it may well -- at least several of the 15 could end up as chips on the table later this year and get thrown into the 1985 tax bill. Here's a quick overview of just some of what this Pandora's box holds for real estate:
* Second-home mortgage interest deductions. A perennial item on the Treasury Department's wish list, the 1985 tax-reform package would make it impossible for buyers or owners of most second residences to deduct their full interest costs on the property. Interest deductions beyond principal home-mortgage and passive-investment income would be capped at $5,000 a year beginning Jan. 1, 1986. Second-home owners are a political minority (one of every 20 households).
They are well-off economically, and thus better cushioned for tax shocks than most, in the reformers' view. Lobbyists such as the National Association of Realtors will fight it tooth and nail, but some form of second-home limitation could be part of a negotiated tax-bill settlement.
* Real Estate Depreciation. The proposed Treasury "Real Cost Recovery System (RCRS)" slashes the tax-shelter attractions of depreciation write-offs enjoyed by owners under the current 18-year straightline approach. The new approach would extend the maximum writeoff period for income property to 63 years, and provide a standard 3 percent per year deductin. RCRS also would index depreciation write-offs to account for inflation year by year.
In an economy with 5 percent inflation, for example, a small rental building with a $100,000 depreciation base that yields $64,000 in accelerated write-offs during the first 10 years under present law would yield just $25,540 under RCRS. Without adoption of a comprehensive, bipartisian tax reform package, Treasury is unlikely to get anywhere near its 63-year goal for real estate in 1985. But it could well convince Congress to push the standard write-off limit beyond 20 or 25 years -- and cost real estate owners and investors billions in the process.
* Tax-exempt financing. Treasury called for elimination of all tax-exempt financing for first-time home buyers (200,000 mortgages a year), and modest-rent apartments ($6 billion to $8 billion worth each year). Home buyers' mortgages might survive the tax-reform bargaining process, but the lower-profile help for renters could face serious funding restrictions.
* Frontal assaults on reas estate syndications. The Treasury plan would effectively kill a large chunk of the tax-sheltered, limited-partnership business. It would tax as corporations all limited partnerships with more than 35 partners, and would end real estate's preferential exclusion from the so-called "at-risk" rules in the tax code. (The latter preference allows investors to take tax deductions far larger than their actual economic stake in a deal through high-leverage financing.) Syndicators will be prime Treasury targets in the coming taxbill shooting match.
* Builder-bond financing. The Treasury reform package attacks the use of so-called installment-sales tax treatment in builder-bond financing transactions. It would eliminate the present tax incentives for home builders to finance the mortgages of their buyers through taxable bond issues secured by buyers' mortgages. The issue is complicated, but the $6 billion to $7 billion worth of new home mortgages currently financed via builder bonds would have to come from somewhere else, beginning, Jan. 1, 1986.
* Tax credits for real estate rehabilitions. The Treasury plan would eliminate the 25 percent tax credit for qualified rehabilitation expenses on certified historic properties, plus the 15 and 20 percent credits on renovations of nonhistoric commercial and industrial properties. Tresury's computers figure that killing the credits could raise federal tax collections by $2.6 billion a year by 1990.
Dollar signs that big make the credits a tempting target. Look for them to be whittled down -- or held hostage to split the ranks of real estate lobbyists -- when Pandora's box is wide open next year.