WASHINGTON -- If you own a home or some form of investment real estate and don't pay close attention to the daily political shenanigans on Capitol Hill, keep these two words in mind: capital gains.
And while you're at it, you might want to focus on two other words that could mean thousands of dollars to you this year or next: effective date.
The reason for extra attention is the pending Republican-sponsored 1995 tax legislation heading for final action between the House and Senate. Though President Clinton has threatened to veto either version of the bills in current form, the political reality is that to keep the federal government funded after mid-November, he and congressional Republicans will need to pass some form of compromise package.
Moreover, since Clinton has expressed at least mild support for capital gains relief, you can bet that any final compromise with the Republicans will contain a capital gains tax strongly resembling the congressionally approved version.
So what does that look like, and what could it mean for you as a property owner or buyer? Here are the key facts: Both the Senate and House bills would cut the effective federal tax rate you pay on your real estate profits from 28 percent at present to a maximum of 19.8 percent for those in the highest marginal bracket. Both bills would permit you to exclude from taxation 50 percent of the gain on the sale of real estate held for a year or more. The remaining half would be exposed to your full, regular income tax rate. Depending upon your income and the size of the gain, that could mean you pay less than the 19.8 percent rate -- an effective rate of 14 percent in the 28 percent marginal bracket, for example, or 15 1/2 percent in the 31 percent bracket.
To illustrate, say you bought a vacation house at the beach five years ago at a distress-sale price. The economy in the area bounced back sharply, and you can now sell the place at a $50,000 profit net of brokerage and other transaction costs. If you sold the house under current law, you'd pay a 28 percent federal capital gains tax on that $50,000 -- a hefty $14,000. Under the likely plan emerging from Capitol Hill, and assuming your total income kept you in the 28 percent marginal bracket, you'd get to pocket $25,000 of that gain off the top, and pay 28 percent on the $25,000 balance.
The bottom line: A $7,000 federal bite out of your gain instead of $14,000.
But before you rush out and put your beach house, rental duplex -- or whatever -- on the market, bear in mind the second crucial two words about capital gains: effective date. The House-passed version of the bill carries an effective date of Jan. 1, 1995. That means it would cover real estate sales retroactive to last New Year's -- a boon to thousands of taxpayers who assumed the best deal they'd get on 1995 sales was 28 percent. Under the House plan they could do a lot better.
The Senate's version of the bill, by contrast, covers sales made after Oct. 13, 1995. So if you closed on that beach house Oct. 12, you'd get no help.
But wait. The effective date may well end up to be neither of the above.
More likely it will be a chip on the table in the proverbial smoke-filled room in November where the final 1995 tax compromise gets hammered out.