More tax breaks appear likely Congress may even smile on a deduction for real estate losses


BESIDES CAPITAL gains relief on the profits when they sell their residences, American homeowners can look forward to several other tax-related benefits that appear likely to flow from the Republican-controlled 105th Congress that convenes in January.

Here's a quick tax update based on discussions with congressional staff members:

Tax relief for owners who incur losses when they sell their houses. Advocated for years by Rep. Bill Archer -- the Texas Republican who chairs the powerful tax-writing Ways and Means Committee -- the home-sale loss concept is a good bet for inclusion in the first major tax bill to move from the committee. It would be of help to thousands of homeowners in areas of the country that have experienced wide fluctuations in real estate values during recent years -- particularly in the Northeast, California and Texas.

Under current law, when you sell a house for a big loss because the local market cratered, you get no tax relief. That's because losses on home sales don't count as capital losses for federal tax purposes. Unlike, say, a capital loss you take on stock sales, you can't deduct a home-sale loss against capital gains in the same year. Lose $30,000 on a home sale and you can't deduct it against anything. Lose $30,000 on stocks and you can write it off against whatever capital gains you've had in the same year. Plus you can take up to $3,000 of capital losses per year and write them off against regular income from your salary.

Under the Archer plan you would be able to treat your home-sale losses as capital losses. Say, for example, you lost $20,000 on the sale of your house. In the same year, you happen to have capital gains of $10,000 from the sale of stock. Under the bill, you could zero out the taxes due on the stock sale gains, using $10,000 of your $20,000 of home-sale losses. You could also write off $3,000 against ordinary income, leaving you with $7,000 in losses to roll over into future tax years.

Retirement-fund reform for first-time home-purchase down payments. Just as Ways and Means Chairman Archer has pushed capital-loss relief for years, so has his Senate counterpart -- William V. Roth Jr., the Delaware Republican who chairs the Finance Committee -- advocated opening up individual retirement accounts (IRAs) for penalty-free down payment assistance to new homebuyers.

Roth is virtually certain to reintroduce his plan from the 104th Congress that would allow parents or grandparents to tap their retirement accounts -- IRAs and 401(k) employee benefit plans -- to help their children or grandchildren make a first down payment. Currently, a withdrawal from an IRA for such a gift warrants a 10 percent tax penalty on top of regular income tax.

If Roth's program makes it through Congress in the new session, tax-assisted, cross-generational down payment gifts -- or loans -- for homebuyers could become widespread among baby boomers and their generation of first-time purchasers. Watch out, though, for the House, or even the Clinton administration, to push for less-sweeping IRA reforms than those pushed by Roth.

House Republicans may prefer a plan that would not allow IRA-tapping for cross-generational down payments, but instead permit buyers to simply draw from their own retirement accounts, penalty-free, for their home purchases. Since the heftiest retirement accounts tend to be in the hands of older workers, such a plan probably wouldn't be of much help to a typical young person trying to scrape together a down payment.

Elimination of the "tainted spouse" and other real estate tax code anomalies. If a compromise version of the Dole-Clinton capital gains proposal passes Congress, it's certain to jettison a variety of complicated, and widely misunderstood, tax code provisions that have dogged homeowners for years.

These include the penalization of divorced or widowed spouses who have already used the $125,000 one-time, tax-free exclusion of gains for sellers 55 years and older, and then marry a homeowner who hasn't. Under current law, the individual who has made use of the exclusion is forever tainted -- like Hawthorne's Hester Prynne -- and any subsequent spouse cannot use the exclusion while married to the tainted taxpayer.

Pub Date: 12/08/96

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