The 99th Congress is barely a week old, but battle lines are forming over major real estate tax changes that could vitally affect American homeowners, renters, investors and developers in 1985 and beyond.
One of the hottest unresolved real estate issues of 1984 -- the so-called "imputed-interest-rate" controversy -- popped up on the new year's agenda within hours of Congress' return. House Ways and Means Committee member Bill Archer (R-Tex.) readied legislation that would gut all the statutory provisions on imputed interest contained in the 1984 tax law.
Archer's bill would "wipe the slate clean again" for homeowners and investors, in the words of an aide. It would force the Internal Revenue Service to return to its traditional tax treatment of seller-financing of primary homes, vacation- and second-home property, farms, small businesses and commercial real estate, no matter how small or large the sale transaction.
When a seller assists a purchaser with below-market "take-back" mortgage financing, in other words, the IRS wouldn't bat an eyelash under the Archer plan, unless the rate on the note was below 9 percent. In that case, the IRS would define the true economic rate on the transaction as 10 percent.
Archer's clean-the-slate repeal bill would throw out not only the original changes on imputed interest in the 1984 tax-reform legislation signed into law by President Reagan last July, but the eleventh-hour modifications made to the law as Congress rushed to adjournment in October.
The original, complex law would have forced seller-financers of homes of $250,000 or less to charge their purchasers at least 110 percent of applicable Treasury borrowing rates (currently 13.4 to 13.5 percent) or face a higher imputed rate for federal-tax purposes. Sellers of commercial property, second homes, businesses and residences sold for more than $250,000 faced even steeper minimum federally set rates, ranging well above 15 percent in some cases.
The eleventh-hour compromise put these controversial changes on ice until July 1 for real-property transactions involving no more than $2 million where sellers' notes carried at least a 9 percent rate. Under the compromise, the 1984 tax-law provisions will take full legal effect after July 1 unless Congress steps in with a new solution.
A key member of the tax-writing Senate Finance Committee, David Durenberger (R-Minn.), thinks he has such a solution -- one more politically palatable to the Treasury, the president and revenue-raising Democrats than Archer's repeal plan.
Durenberger intends to introduce legislation that will exempt all residential and commercial transactions under either $1.5 million or $2 million from provisions of the 1984 Tax Reform Act. Property transactions above that level will need to carry a rate of just 80 percent of the applicable Treasury borrowing rate -- 10.7 percent currently -- to escape special IRS scrutiny.
Although it is still too early to predict with certainty, Capitol Hill tax specialists say Durenberger's bill or something akin to it offers the best bet for real estate owners and investors this session. They argue that absolute repeal of the 1984 imputed-interest legislation would be difficult to get past the House Ways and Means Committee's tough chairman, Dan Rostenkowski (D-Ill.), as well as Senate Majority Leader Robert J. Dole (R-Kan.), the two principal architects of last year's tax-law changes.
Repealing everything up to the $1.5 million or $2 million levels, on the other hand, "would give just about everybody what they want," according to a tax committee staff member.
Small-scale home sellers, buyers, farmers, businessmen and real estate investors "could forget that 1984 even happened," he said. Larger-scale investors and sellers also would get a lower minimum interest rate standard than under current tax law, and could easily adjust to the new system.
Whatever the ultimate solution to the imputed-rate controversy, it's likely to get tied up this spring with other tax and revenue issues on the congressional deficit-reduction docket. Ways and Means Committee member Bill Gradison (R-Ohio), for example, wants Congress to raise federal taxes on real estate dollar-for-dollar to cover any federal revenue losses caused by loosening the 1984 standards on imputed rates.
Fellow committee member Fortney (Pete) Stark (D-Calif.) has some provocative places to start. He is completing a bill that would tax all real estate limited partnerships with more than 35 investors as corporations. His bill would kill the multibillion-dollar real estate tax shelter industry in one fell swoop.
Stark also is considering a far more controversial concept: replacement of current capital-gains tax treatment on real estate sales and exchanges with an automatic national transfer tax, possibly as low as 4 percent.
All changes in ownership of houses, commercial buildings, apartments or land would be hit with the levy. Although the revenue estimates aren't complete, Stark's tax legislation advisers think that even a 4 percent transfer tax would raise more federal dollars than the current, deduction-laden system.