As President Clinton's second term officially begins tomorrow, and his fiscal 1998 budget begins to take shape, homeowners should be aware of a tax-relief nugget being considered just for them.
Real estate industry officials in Baltimore and the rest of the nation believe the one-time $125,000 capital-gains tax exemption homeowners 55 years or older can take on the profits from a sale of their homes will be expanded.
During the 1996 presidential campaign, both Clinton and Republican challenger Bob Dole offered plans to widen the exemption. Since the election, the idea has maintained bipartisan support.
Clinton's campaign proposal called for those selling a home to pay no capital-gains tax on profits of up to $250,000 for single persons and $500,000 for couples. There would be no age requirement, and a person could use the exemption every two years in the sale of a home. If the gist of the proposal remains intact when the budget is submitted in early February, according to officials, it will have only positive benefits for the industry and homeowners.
"I think what we can all look forward to is an expansion of the benefits," said James P. O'Conor, chairman of O'Conor, Piper and Flynn, "and it will have a positive impact on the residential real estate market."
O'Conor said the National Association of Realtors is cautiously optimistic that the legislation will be approved. In fact, in his opinion, "it's almost a given."
One of the reasons why it has broad support is that the cost to the government is very little.
"It sounds good. It's very appealing. It's going to cost very little. And there is a certain amount of economic logic to it," said Bob Van Order, chief economist for the Federal Home Loan Mortgage Corp. Freddie Mac provides a flow of funds to lenders by buying mortgages and selling them as securities to investors.
Van Order estimated the cost to the government to be in the vicinity of $600 million a year, but, as O'Conor added, "the lost tax revenue is relatively peanuts compared to the total picture."
"People really don't pay much in capital-gains taxes mainly because they are always trading up," Van Order said.
Under current law, sellers can defer their tax obligation by "rolling over" the gain into a equal or higher-priced home. If not, and they are younger than 55, they would typically pay 28 percent on the profit made on the sale. For example, a seller who walks away from the settlement table with a $10,000 profit would have to pay the federal government $2,800 in capital-gains taxes.
"The key thing is to release people from the hierarchy of rules that are attached to a current resale," said Arthur E. Davis of Chase Fitzgerald & Co. He is a regional vice president for the National Association of Realtors.
"I think you would see a lot more movement in the market," he said. "Not that there would be a glut on the market, but it would allow people to make housing choices unfettered by the fact that the tax laws dictate that they stay in the house."
Davis said a revision of the current law would help elderly longtime homeowners who have paid down their mortgage and who have enjoyed significant appreciation. He cited his mother, who bought her home in Guilford in the 1950s for $50,000.
"If she sold the house now, the $125,000 [exemption] is not really going to protect her because of her long-term gain," he said, noting that the house is valued at $500,000. "The inspiration for her to move into a condo isn't there at all. If she wanted to trade down and perhaps buy a $200,000 condominium, which would be more reflective of her needs at this time, it just wouldn't make sense."
Davis added that the current law also may play a role in the decision of the elderly to consider moving into a retirement community. "There is no [tax] shelter when you buy into a continuing-care facility," Davis said, "so, it's all gain."
Davis, whose company does a good part of its business in Guilford and Roland Park, also has seen "widows and widowers staying put even to the point where the house begins to own them." Those houses, he said, do not get the kind of maintenance they need and ultimately lose value when they go on the market.
The capital-gains exemption not only affects the options for the elderly homeowner, it affects younger homeowners who get hit with a tax liability when they move from metropolitan areas into rural settings, according to Grant Myd-land, a vice president for the American Homeowners Association.
"Younger homeowners are turning down opportunities for jobs in lower-costing markets because the can't exchange the home and escape the taxes," Myd-land said.
His association, a home advocacy group based in Alexandria, Va., strongly supports the proposed changes and can easily see how -- if enacted -- it would help those homeowners as well as have other implications.
"If I have a $300,000 house and I'm going into a $200,000 home in Tennessee, which is still a luxury home, now I'll have this excess money [$28,000 in taxes otherwise paid] that I didn't have to give to the government.
"I can now afford to do the renovations that I wanted to do. So if you talk about what effects it would have on other segments of the market, anybody who is in the renovation business is certainly going to get a boost."
O'Conor agrees that enhancing the exemption would have other benefits.
"With the money they [sellers] will save, they'll go out and spend anyhow," O'Conor said. "Before it just went into the tax coffers. Now that money will be reused and recycled.
"This is a no-brainer."
Pub Date: 1/19/97