Congress packed its bags and took off for a month-long vacation last week, but not without taking some significant steps affecting real estate.
The House and Senate's eleventh-hour agreement on a deficit-reducing budget package, for instance, calmed at least a segment of the worriers and doomsayers in the residential mortgage market. Had Congress headed for the beach without agreeing on $280 billion in deficit cuts over the next three years, home-loan rates would have come under new pressure, according to top mortgage economists.
"There's no question in my mind that the capital market would react adversely in August and September" -- pushing rates up by as much as one-half a percentage point -- had a politically acceptable budget package not been achieved, said James Christian, chief economist of the U.S. League of Savings Institutions.
With at least a "symbolic commitment to work on the deficit" in hand, rates are likely to remain relatively stable for the next month or two, Christian added.
"The skittish psychology of the market required it," and Congress finally delivered the nation a budget, he said.
What Congress didn't deliver before departing, however, also will prove important for thousands of home buyers, retirees and investors. A mini tax bill loaded with real estate provisions came close to passage, but got sidetracked in the closing moments of the Senate's session.
It received final approval of the House and Senate conferees, and passed the full House itself. Once Congress reconvenes in September, the full Senate is likely to vote approval and send it to the White House.
Among key items in the bill are: The final resolution of the seemingly interminable controversy over real estate seller-financing and "imputed interest rates."
*An attractive new tax incentive for retirees to participate in so-called life-care facilities.
*A clarification of the tax code's treatment of below-market-rate employe-relocation loans that are used to purchase homes in a corporate transferee's new place of work.
*A one-year increase in the standard depreciation period formal investment and commercial real estate "placed in service" after May 8, l985. The straight-line-depreciation standard jumps from 18 to 19 years.
The House-Senate conference resolution on imputed rates boiled down to this: When a seller helps finance the sale of real property through a "takeback" mortgage as high as $2.8 million, the loan will be able to carry an interest rate as low as 9 percent without bothering the Internal Revenue Service.
If the loan contract rate is below 9 percent, Uncle Sam will be empowered to assign, or impute, a higher rate, equal to the government's so-called AFR, the applicable federal rate.
The government's three AFRs, based on the current Treasury costs of short-term, medium-term and long-term capital, range up to 10.62 percent at present.
The new rules will cover virtually all forms of residential real estate sold in the country, as well as most small-scale investments in income-producing commercial properties.
Buyers and sellers of larger-scale real estate will have to operate under somewhat different rules. When a transaction involves more than $2.8 million worth of seller-financing, the seller's note will have to carry a rate equal to the appropriate short-, medium- or long-term federal rate.
A 10-year, $3 million purchase-money note on an apartment building, in other words, would have to have a minimum rate of 10.62 percent -- the government's applicable minimum figure for long-term notes this month.
The tax bill's provisions on retirement housing -- added originally by Sen. John Heinz (R-Pa.) -- could have far-reaching effects as well. Essentially, the legislation exempts from "imputed-rate" tax coverage refundable, up-front deposits of $90,000 or less made by elderly residents of continuing-care or life-care projects. The 1984 tax reform law would have permitted the IRS to tax retirees in continuing-care facilities for the imputed-interest income they received in nursing and other services from their lump-sum deposits.
Removing this disincentive "will be extremely helpful" to current and would-be residents in life-care communities, according to Stephen Norris, a vice president of Marriott Corp.
Marriott, which is planning to develop a series of such communities around the country, lobbied Congress for the change, along with senior-citizen groups.
The new tax bill's increase of the standard depreciation term for income real estate is designed to raise $900 million in additional revenue yearly for the Treasury. It will not affect properties owned or placed in service prior to the May 8 cutoff date.
The legislation's changes to the tax code affecting relocation loans clarify a problem created by last year's tax bill. When an employer offers a transferee a cut-rate loan under 9 percent to purchase a new home, the applicable federal rate in the transaction will be the AFR in effect at the time the sales contract is signed. Under last year's bill, the AFR was the rate in effect when the employer's loan was extended, many months before the employe actually purchased a replacement house.