WASHINGTON -- A package of tax reforms designed to help home sellers, first-time buyers and seniors is alive -- if not completely well -- on Capitol Hill, and pieces of it could be heading for President Clinton's desk within weeks.
Congressional staff sources say that some of the housing provisions in the massive, seven-year balanced-budget bill (H.R. 2491) vetoed by the president in December may be attached to the federal debt limit extension legislation expected by March 1. Some form of capital gains tax relief -- applicable to residential real estate as well as to other capital assets -- is considered highly likely to be incorporated in any Republican-backed extender.
Of the provisions in the vetoed bill that related specifically to homeownership, the most likely to reappear in even a stripped-down debt extender, sources say, is a plan to help homeowners who incur losses when they sell their houses. Here's what the provision would do: Under current tax law, your principal residence is treated as a capital asset when you sell it for a profit, but not when you sell it for a loss. Sell a portfolio of stocks and bonds for a loss and you get to write it off against any capital gains you've incurred in the same year.
But take a loss of tens of thousands of dollars on the sale of your home and you're treated differently. That's because the Internal Revenue Code defines it as a nondeductible "personal" loss.
The new rule would eliminate this anomaly. You'd be able to write off losses from the sale of your principal residence against any capital gains you've had in the same year. If your home sale losses exceeded your capital gains, you could roll them over into future tax years when you rack up capital gains.
If you chose to write off your home sale losses against your ordinary income, you could with this limitation: Each $2 in home sale loss would offset just $1 in ordinary taxable income.
Other housing tax package items from the vetoed balanced-budget bill that are candidates for inclusion in the debt limit extender:
* Parents and grandparents would be allowed to withdraw up to $10,000 penalty-free from individual retirement accounts as contributions toward the down payments on first-time home purchases by their children or grandchildren.
* Ending the so-called "tainted spouse" problem that exists for seniors 55 years or older who seek to use the $125,000 tax-free write-off on their home sale capital gains. Under current law, homeowners 55 years or older can take a one-time-only "exclusion" of up to $125,000 of gain on the sale of their principal residence. If the home sellers are a married couple, the use of the one-time exclusion covers both individuals, for as long as they live. Should the couple subsequently divorce, or one of the spouses remarry after the death of the other, the prohibition against re-use of the $125,000 exclusion covers the new spouse -- even if he or she would otherwise be fully qualified to use it.
The reform proposal would eliminate this remarriage penalty for seniors. It would allow any otherwise qualified taxpayer to take the $125,000 exclusion, so long as the individual owned his or her home for at least three years prior to marrying a taxpayer who had already used the exclusion.