A tax-reform bill that's the focus of major debate on Capitol Hill -- a Democratic alternative to the Reagan proposal -- offers a new set of pluses and minuses for American homeowners and real estate investors.
How you'd fare under the so-called Rostenkowski reform plan depends on what you own, how much you earn and where you live. The Rostenkowski label on the 139-page draft outline before the House Ways and Means Committee refers to Rep. Dan Rostenkowski (D-Ill.), who is chairman of the tax-writing committee and who directed its staff to devise the proposal. Here's a quick guide to the key real estate provisions in the new reform proposal:
For purchasers, sellers and owners of moderately priced second or vacation homes, the Rostenkowski bill provides distinct improvements over the original Reagan plan.
The new bill would permit annual tax deductions of "nonbusiness" interest -- such as on second homes -- up to the amount of taxpayers' annual mortgage interest costs on their principal residences, or $20,000, whichever is greater. If taxpayers had "net investment income" during the year, that amount would be added to the second-home write-off ceiling. (Net investment income is defined in the tax code as stock dividends, interest on bank deposits, bonds, royalties and rents, minus any attendant expenses such as brokerage fees.)
For example, a two-earner family with $10,000 in annual mortgage-interest deductions on their principal home and $4,000 in net investment income would be able to write off at least $14,000 in non-business interest costs under the bill, including mortgage-interest payments on a modest house at the beach or a ski condo in the mountains.
Confusing though it may sound, the Rostenkowski plan is more generous to 2 million vacation homeowners than President Reagan's original reform proposal. The Reagan plan would have capped non-business interest write-offs at $5,000 a year, far below the typical annual debt burden of families who own recreational condos or houses.
Although the new $20,000 maxi-cap should take care of the majority of middle-income, second-home-buying taxpayers, it won't help if you fall into either of these categories:
*You've invested heavily in real estate limited partnerships that produce large annual interest losses, thereby eating away your net investment income.
*Your principal home is expensive enough to generate more than $20,000 in annual mortgage interest costs, you want to buy a costly second home and you don't have much net investment income for additional shelter. In such a case, relatively little of your interest expense on a second home might be deductible under the Rostenkowski plan.
Another set of real estate winners under the Rostenkowski bill (at least in relative terms) are the nation's restorers of historic buildings. Under the Reagan plan, they would lose the 25 percent investment tax credits they currently enjoy for rehabilitation expenditures on historic properties, beginning next Jan. 1.
Rostenkowski's bill, by contrast, tosses a lifeline to rehabbers. It would preserve the investment credit on historic buildings, but reduce it from 25 to 20 percent. It also would allow 10 percent credits for rehab expenditures on nonhistoric commercial and industrial buildings constructed before 1935 (nonhistoric structures qualify for 15 percent credits under present law).
The real estate losers under the Rostenkowski bill are numerous. Here are some of the biggest:
*Investors in rental residential, commercial and retail property would be forced to take depreciation deductions over a 30-year period rather than the current 18-year standard. They also would be prohibited from using anything but "straight-line" computations of those depreciation write-offs, that is, equal deductions year by year over the full 30-year term.
On resale of the property, the investors would have to pay tax at ordinary income rates on all depreciation write-offs taken during the period of ownership. Under current law, such "recapture" is required only on accelerated depreciation write-offs taken beyond straight line.
*Investors in real estate partnerships would be required to limit their annual deductible losses in a venture to the amount they actually have "at risk." For example, if a limited-partnership member has only $20,000 personally on the line in a deal, he or she can't write off more than that at tax time. Under present law, there's no specific limit to such write-offs.
*Tax-exempt financing of apartment complexes, economic development projects, downtown redevelopment and other ventures would be restricted, beginning next year. The upshot would be fewer below-market-rate home mortgage programs sponsored by local housing agencies, and fewer small-business activities funded through cut-rate, tax-exempt local loans.
*uctions would be limited to either $1,000 a year or 5 percent of a taxpayer's adjusted gross income. Either way, monthly housing costs for the typical owner of a home in a high-tax state would go up.