Victim of tax cut veto: first-time homebuyer; 65,000 in middle class await discount loans


PUTTING aside the heavily partisan rhetoric of the event, President Clinton's veto of Congress' 1999 tax-cut bill will have real-life effects on thousands of homebuyers, sellers and owners across the country.

Though you may never have heard or read about them, several important housing-related provisions were tucked away in the ill-fated tax bill.

For example, an estimated 65,000 to 75,000 middle-income, first-time homebuyers around the country won't be able to obtain the discount-rate mortgages they could have had if the president had signed the bill. Many of these would-be buyers are on waiting lists to qualify for bond-financed home loans from private lenders who work with state and local housing finance agencies.

The mortgages are oversubscribed because they offer precisely what typical first-timers need: fixed interest rates well below prevailing market quotes; low down payments; and generous credit-quality and debt-to-income ratio rules. In some parts of the country, bond-financed loans represent the No. 1 source of mortgage money for young first-time buyers. Nationwide, about 130,000 families a year buy their first house with the help of state and local programs that use federally tax-exempt bonds. Interest rates on the bonds are low because private investors don't have to pay federal taxes on the interest they earn.

But by federal law, the supply of such mortgage money is strictly limited and apportioned. The tax bill would have increased federal funding authority by 50 percent -- enough to make home loans to another 65,000 to 75,000 every year. The extra money itself was not a partisan issue. Republicans and Democrats strongly favored the increase, with about three-quarters of the members of both the House and Senate co-sponsoring the measure.

The same was true for another little-noticed housing provision aimed at lower- and middle-income families. The bill would have increased the number of rental apartments and houses constructed or renovated using federal tax credits by an estimated 28,000 per year. The increase had overwhelming bipartisan support in both houses. But because it, too, was part of a larger bill that split the parties bitterly over Medicare, Social Security and spending, it ended up an innocent victim. Other tax-bill losers:

Military, Foreign Service and private employees who want to sell homes after extended periods of time overseas.

The bill contained a correction to provisions in the Internal Revenue Code that discriminate against such homeowners. Under the code, taxpayers who've owned and occupied their principal residence for two out of the previous five years are allowed to exclude up to $500,000 (married, joint-filing couples) or up to $250,000 (filing a single return) of their profits after a sale.

That requirement presents a hurdle for employees who are relocated overseas and subsequently want to sell their home. They may have owned and occupied it for years, but because of their overseas assignment, they may not have lived in their home for a full two years out of the preceding five. As a result, they are unable to meet the technical qualification for the full $500,000/$250,000 tax-free exclusion.

Since armed forces, Foreign Service and private-sector personnel often have little control over where their employers ask them to serve, Congress decided to eliminate this tax trap. The bill would have suspended the periods of time a homeowner was serving overseas from the home sale capital-gains calculations. Sellers who owned and occupied their homes for two years and then were transferred overseas for four years, for example, would qualify for the full $500,000/$250,000, even though they were in residence for just one of the past five years.

Now, they only have one year of qualified ownership and occupancy out of the last five -- and they stand to lose half of their maximum tax-free gains.

Buyers, owners or renovators of historic-area homes.

The bill would have provided new tax incentives to anyone seeking to preserve or fix up historic-district residential property that they own and plan to live in. It would have allowed deductions of 50 percent of the expenses incurred in renovating or preserving a historic home, up to a maximum write-off of $50,000. The National Trust for Historic Preservation, the prime force behind this part of the bill, estimates that thousands of homes across the country -- especially in historic downtowns -- could have benefited from the new incentives.

What's next for these noncontroversial, helpful tax changes?

John McEvoy, executive director of the National Council of State Housing Agencies, says he's "hopeful" that Congress may bring together a second tax package before the end of the year that the president could sign. More likely, though, he says, "We're all going to have to look to next year."

Kenneth R. Harney is a syndicated columnist. Send letters care of the Washington Post Writers Group, 1150 15th St. N.W., Washington, D.C. 20071.

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