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Tax Relief for Sellers Who Lose on Sale?

June 15, 1997|KENNETH R. HARNEY | SPECIAL TO THE TIMES

WASHINGTON — Pressure is growing on Capitol Hill to provide some form of tax relief for a potentially large group of homeowners who have been left out of most balanced-budget deliberations so far this year:

People who lose money when they sell their homes.

Influential tax committee members in both the Senate and the House have begun calling for reform of the federal tax code to allow home sellers to claim a capital loss when they sell for a loss, just as they report a capital gain when they sell for a profit.

Sens. Connie Mack (R-Fla.) and John B. Breaux (D-La.), in a May 23 letter to the chairmen of the Senate Finance and the House Ways and Means committees, urged the leaders to treat losses on sales of homes like losses on sales of other capital assets.

A pending, bipartisan bill sponsored by Sens. Orrin G. Hatch (R-Utah), Joseph I. Lieberman (D-Conn.) and Charles E. Grassley (R-Iowa) would do the same.

On the House side, Ways and Means committee chairman Rep. Bill Archer (R-Texas) has supported capital-loss relief for homeowners in the past, and is under committee pressure to do so again.

Under current federal tax law, home sellers get favorable capital gains treatment whenever they sell their residence for a profit. But if they are unlucky enough to sell for a loss, they don't get to declare a capital loss.

That anomaly in the law has proved to be costly for residents in parts of the country--from the Northeast to the West Coast--where property values softened and sagged during the late 1980s and into the 1990s.

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For example, a Southern California homeowner who bought his residence in 1990 and sold it in 1995 for a $30,000 net loss would not have been able to write off the $30,000 against anything. But if the same taxpayer had instead lost $30,000 on a sale of a block of stock, he could have used the loss to offset whatever capital gains he racked up during the same year. Plus, he could have taken up to $3,000 of his capital losses on the stock each year and written them off against his regular income from his salary.

To provide equal treatment for all types of assets, pending legislative proposals would amend the tax code to lump a "principal residence" in with other capital assets with respect to deduction of losses.

Say, for instance, that you lost $20,000 on your home sale. During the same year, though, you also made a $10,000 capital gain in the stock market. You'd be able to partly offset your taxable gain with your capital loss. You could zero out the taxes due on your stock sale gains, using $10,000 of your $20,000 home sale capital loss.

You could write off $3,000 more of the home sale loss against your regular income and "roll over" the remaining $7,000 into future years to be used to offset future capital gains.

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The capital loss proposals under discussion wouldn't reach back to help homeowners who experienced losses in previous years. The Hatch-Lieberman bill, for instance, would cover losses experienced in home real estate transactions closed after Dec. 31, 1996. However, if included in the 1997 balanced budget tax cut package, that date might be rolled ahead to May 7, 1997--pinpointed by the congressional tax committee chairmen as the effective date for any capital gains-related tax law changes.

Despite the capital loss plan's seemingly modest scope, it comes with one major complication:

It's a substantial revenue loser, at a time when even legislators sympathetic to the concept, such as Ways and Means chairman Archer, are being forced to search for new revenue raisers to stay within the balanced budget deal.

The American Council for Capital Formation estimates that the Hatch-Lieberman proposal would lose about $2.3 billion during its first five years.

By contrast, the Clinton administration's proposed capital gains cut for home sellers who make a profit on their sales would lose an estimated $1.4 billion during the same period.

The Clinton proposal--allowing married home sellers filing jointly to pocket up to $500,000 in sale profits tax-free and single filers to pocket up to $250,000 tax-free--is considered a slam-dunk for inclusion in any final tax package this year.

The outlook on capital loss treatment? Murky at best, mainly because of the proposal's big revenue costs. But don't count it out. With its strong bipartisan support and inherent tax fairness theme, capital loss deduction reform for home sellers could go all the way and end up in the big bill expected from Congress late this summer.

Distributed by the Washington Post Writers Group.

(BEGIN TEXT OF INFOBOX / INFOGRAPHIC)

Average Mortgage Rates and Indexes

Weekly Survey of 90 Southland Lenders as of July 5, 1997

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Latest One Week Six Months week previous previous Rates for loans under $214,600 30-year fixed 7.66%/2.00pt 7.78%/2.06pt 7.35%/2.02pt 30-year ARM start rate 5.84%/1.33pt 5.85%/1.40pt 5.48%/1.54pt 15-year fixed 7.35%/1.75pt 7.47%/1.8pt 6.99%/1.96pt Rates for loans over $214,600 30-year fixed 7.80%/2.03pt 7.91%/2.08pt 7.57%/2.09pt 30-year ARM start rate 5.76%/1.65pt 5.76%/1.71pt 5.47%/1.60pt 15-year fixed 7.56%/1.87pt 7.68%/1.86pt 7.30%/1.86pt FHA or VA mortgage average points 8.00%/1.03pt 8.00%/1.50pt 7.50%/1.89pt CALVET 30-year ARM start rate 8.00% 8.00% 8.00% 6-month LIBOR 5.938% 5.969% 5.563% 1-year treasury bill 5.760% 5.860% 5.420% 6-month treasury bill 5.200% 5.250% 5.020% 6-month certificate of deposit 5.820% 5.850% 5.420% Prime rate 8.500% 8.500% 8.250% 11th District cost of funds 4.822 4.780 4.839 For the month of Apr 97 Mar 97 Oct 96

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Compiled by Mortgage News Co., Santa Ana

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