There is a political war of nerves under way on Capitol Hill that poses potentially serious financial problems for thousands of real estate buyers, sellers and investors across the country.
The focus of the controversy is nothing more than a date -- New Year's Day 1986. That happened to be the so-called "effective date" for the majority of proposed tax code changes included in the tax reform bill passed last December by the House.
Some of the changes would sharply scale back the traditional tax benefits available to buyers of real estate ranging from small-scale rental homes and condominiums to mega-bucks investors in deep-tax-shelter partnerships.
The problem is this: On one hand, hardly anyone in Washington believes that Jan. 1, 1986, will end up being the effective date for all tax reform provisions currently covered by it in the House-passed bill.
On the other hand, nobody in Washington -- least of all the legislators and staff crafting the Senate's version of the 1986 tax reform bill -- can, or will, say what date or dates are more likely than Jan. 1, 1986.
New Year's Day indeed could be retained as the effective date, retroactively, for several of the most important provisions of the tax bill affecting real estate such as depreciation write-offs for rental and business properties. The House-passed bill extends the standard depreciation period to 30 years, up from the current 19. It also eliminates use of "accelerated depreciation" techniques commonly used to magnify write-offs in the early years of an investment.
The net effect of the depreciation provisions is to slash the typical tax write-offs available on small-scale rental real-estate investments in the early years. For example, a rental condominium town house with a $100,000 depreciation base that would provide nearly $9,000 worth of accelerated write-offs the first year under current law would provide $3,333 under the House-passed bill. Lower tax benefits, in turn, almost certainly would mean lower resale values for such properties. That would include tens of thousands of units owned by small "The resolutions were pure baloney. We on the committee never accepted them, and they have no force of law." -- A Rostenkowski tax aide investors hoping for eventual capital gains, rather than current income.
How does the war of nerves over Jan. 1, 1986, enter the picture? Rather dramatically, if you're considering making an investment in any form of real estate or limited partnership this year.
Will the Jan. 1, 1986 date cover your investment, even though only the House has passed the bill? Or should you take a gamble and hope that the Senate will set the dateback and give you a break on purchases completed prior to presidential approval of any final legislation?
Where do you look for an answer? To the two tax-reform "resolutions" passed by the Senate and the House prior to their Christmas adjournment?
That's not a bad idea, at first blush. The House resolution called upon the Ways and Means Committee chairman, the chairman of the Senate Finance Committee and the secretary of the Treasury "to make public. . . an agreed-upon statement which would have the effect of postponing the effective date of tax reform to Jan. 1, 1987."
The Senate resolution expressed a similar desire for a Jan. 1, 1987, effective date. Both resolutions noted their intention to provide the nation with a sense of certainty about the rules of the tax game for 1986.
"Uncertainty as to the future of tax provisions," said the Senate, "is causing taxpayers either to delay decisions that they otherwise would make or to rush into transactions" that they'd otherwise postpone or avoid -- an unacceptable distortion of the domestic economy.
With such strongly worded, unambiguous resolutions from both the House and Senate, why is there a war of nerves on effective dates under way in Washington?
It's because none of the three key players in tax-reform legislation -- Ways and Means Committee Chairman Dan Rostenkowski (D-Ill.); Senate Finance Committee chairman Bob Packwood (R-Ore.), or Treasury Secretary James Baker -- apparently will comply with the Senate- and House-passed resolutions.
"The resolutions were pure baloney," one of Rostenkowski's key tax aides said in an interview. "We on the committee never accepted them, and they have no force of law. The effective date is Jan. 1, 1986, period."
On the Senate side, an aide to Packwood put it this way: "We may move back some of the dates later in the year, but I wouldn't do any real estate deals that aren't predicated on a Jan. 1, 1986, starting date."
How's that for certainty?
"We may just have to leave things turning slowly in the wind for a while regarding effective dates ," the aide added, "to speed up serious consideration of tax reform as a whole."