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Tom Kelly
Tom Kelly
The Real Estate Adviser

October 4, 1996

ELECTION MAY CHANGE HOME PURCHASE PLANS

BY TOM KELLY
The Real Estate Advisor

As we grow older, certain birthdays spark new opportunities. Often we dwell on what we no longer are able to do instead of focusing on the positives that come with age -- not the least of which is wisdom from common experiences.

A simple example occurred 16 years ago when I could not wait to turn age 30. That gave me the opportunity of playing basketball in over-30 park leagues where the players are not as swift, tall and strong.

The biggest birthday in housing -- and probably the entire subject of estate planning -- has been number 55. That's the year folks have been able to sell their principal residence and take a tax-free exemption of $125,000 to use any way they want.

The new capital gains proposals brought by both President Clinton and GOP presidential nominee Bob Dole on principal do away with the one-time, over-55 exclusion yet most homeowners will stand to benefit, not lose, under both plans.

In fact, there are no critical time thresholds contained in either plan -- except for the start date of both designs. If accepted, changes would begin for sales after January 1, 1997.

Here, with the help of Ellen Sinko from the accounting office of Delloitte & Touche LLP, are the proposals in a capsule:

Clinton Plan -- Clinton's proposal is more advantageous in the near term. Under the Clinton proposal, up to $500,000 for joint filers and $250,000 for single filers would be excluded from the capital gain they received from the sale of a home. The exclusion would be available every two years and would be effective January 1, 1997.

So, if you continued to buy in appreciating neighborhoods, you could repeat the capital-gains cash flow every two years. And, all homeowners would not have to wait until age 55 to pocket a gain and buy down to a smaller, least expensive home. You could exercise that tax-free exclusion at any age.

Dole Plan -- Under the Dole proposal, individuals would be entitled to an exclusion of income of up to $250,000 from the capital gain realized from the sale of their home if they have lived in that home three of the last five years. The exclusion would be increased by an additional $25,000 for each year the house was used as a principal residence beyond the 10th year for a maximum exclusion of $500,000. For single filers, the allowable exclusion would be cut in half. Also, the exclusion would be pro-rated for homes sold within three years of purchase under the proposal, which would be effective January 1, 1997.

"The Dole proposals are a bit unwieldy," Sinko said. "I think they would be difficult to implement the way they are now. For example, the pro-rated idea for persons who have lived in their homes fewer than three years is not terribly clear nor precise."

Under the Dole the proposal, a taxpayer would have to own and use their home as their principal residence for 20 years to get the full benefit of the deduction.

Also under the Dole proposal the maximum rate of tax on the net capital gain of individuals will be reduced from the current 28 percent to 14 percent. Any net capital gain taxed at a 15 percent rate would be taxed at 7.5 percent rate. However, the tax would not be reduced on certain capital gain items such as collectibles or a portion of the gain on real property used in a business.

Common to both plans -- Both proposals replace the existing rules that allow taxpayers to rollover a realized gain where they sell their home for a more expensive one, as well as the one-time only exclusion for taxpayers age 55 and over. Taxpayers would not longer have to purchase more expensive homes within two years to get a deferral and avoid paying taxes on the gain. Also, both plans would generally simplify paying taxes on home sales and eliminate the burden of maintaining records on home purchases and sales.

"The exception to that rule would be under the Dole plan," Sinko said. "If a taxpayers wanted to receive the maximum benefit under the plan, they would have to prove they lived in the home for 20 years. And, proving you have lived in the home three of the past five years also will take some bookkeeping."

If you are considering home sale this year, you may wish to delay the closing until January -- especially if you want to "buy down" into a smaller, less expensive home and avoid the capital gains liability. Several options would be available to you, including paying rent to the potential buyer to stay in your home. That would be an attempt to repay the potential buyer for any inconvenience the delay may cause. It would also send a sort of reverse "earnest statement" that the delay is critical to financial future.

However, tax considerations often are overestimated in the sale of a house. If the closing is going to reduce your stress and keep your buyer, you may be better off to seal the deal and move on with life.

Remember, these are only proposals in an election year. They will most likely need to be moderated and they will definitely have to be approved.



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