SAN DIEGO — The proposed Tax Reform Act of 1986 hasn't even been signed into law by President Reagan, but top housing officials who gathered here last week are already laying plans to modify the legislation next year.
Meeting at the California Assn. of Realtors 82nd annual convention, top officials of both CAR and its parent, the National Assn. of Realtors, vowed to change provisions in the proposed tax law that they say will be bad for housing and bad for business. In particular, the realtors plan to "correct" the way the new law would treat losses generated from so-called "passive" investments and change the way the legislation would affect sales made on an installment-sale basis. They also want to loosen proposed restrictions on some government-related housing programs that could sharply reduce the supply of affordable housing in California and across the nation.
President Reagan is expected to sign the sweeping tax-overhaul legislation within days.
The vehicle for the planned changes will not be another tax-reform bill. Instead, realtors--along with hundreds of other trade groups--hope they'll be able to make their modifications in the "clean-up" bill that inevitably follows a piece of legislation as broad and confusing as the Tax Reform Act.
Such corrections are typically made by Congress when previously passed legislation was unclear or had unexpected side effects. But they also reflect the concerns of powerful trade groups, a category which includes both the 105,000-member CAR and the 675,000-member NAR.
In a luncheon speech to California realtors, NAR president Clark Wallace said he and other executives from the national association plan to meet with treasury secretary James Baker to devise "the largest technical corrections bill in history."
A key element of the new legislation would drastically reduce an investor's ability to write off losses from passive investments--property which they do not actively manage--unless they had a like amount of income from passive investments. Although this provision is primarily aimed at tax-shelter investors looking for huge write-offs, CAR president Richard J. Rosenthal of Venice said it will also hurt small- and medium-size property owners.
In attempting to eliminate some instances of tax avoidance, "Congress captured thousands of legitimate real estate investors in its net," Rosenthal said. For example, he said, the bill would prevent some investors from writing off out-of-pocket losses as they occur.
The new tax law will also cut back on the tax benefits of selling property on an installment-sales basis. In such a transaction, a seller has typically been able to cut his tax bite by taking payment for his property over a number of years.
Congress decided to put tight restrictions on the way the Internal Revenue Service will handle future installment-sales contracts, primarily because some large, crafty sellers devised slick ways of taking advantage of the installment-sales rules. But, Rosenthal says, the proposed curbs the tax-reform act will place on installment sales will hurt many small owners of real estate, as will the new rules affecting passive losses.
Another focal point of the realtors' modification efforts next year involves new tax-law changes to mortgage-bond sales used to finance the construction or purchase of affordable housing.
Bill Could Kill
"The bill puts so many restrictions on the program that it will effectively kill it in many areas of California," Rosenthal said.
Just how successful realtors will be in revising the coming tax-reform act remains to be seen. Both Rosenthal and Jack Paulson, a San Jose broker who will serve as CAR president in 1987, say the realtors' group will also be dealing with several other issues affecting the housing market. Among those are the Reagan Administration's plan to raise the fees buyers must pay to use the Federal Housing Administration's popular loan-insurance program, the potential sale of the FHA to the private sector and proposals that could adversely affect the Federal National Mortgage Assn. and the Federal Home Loan Mortgage Corp. Paulson said the changes being considered for Fannie Mae and Freddie Mac, two agencies which help make more mortgage money available to home buyers, would result in higher interest rates and fewer fixed-rate loans.
"We've certainly got a full plate of issues for next year," Paulson said. However, he noted, the fact that 1987 is not an election year should make realtors' efforts to revise the coming tax law easier, because legislators will not be in the public spotlight.