Realty Times: Tax Bills = More Money For Real Estate

August 3, 1999

by Peter G. Miller

Tax Bills = More Money For Real Estate

If you want to raise property values and increase home ownership rates, the fastest way to do it is to make people richer. And that, in capsule form, will be the result if the tax relief bills now on Capitol Hill are signed into law.

The measures from the House and Senate differ somewhat, and a combined bill must either be approved by the President or passed over his veto, but tax change is clearly in the air. The good news for real estate is that if a law emerges which reflects the proposals passed so far, then buyers, sellers, and brokers will be ahead.

What makes the suggested legislation so attractive?

Over the next ten years tax rates would fall 10 percent under the House measure (H.R. 2488, "The Financial Freedom Act of 1999"). The Senate approach is somewhat different: the bottom tax rate, which is now 15 percent, would be reduced to 14 percent and more income would be taxed under the lower rate then with the current structure. In either case, the result would be more dollars available to consumers and thus marginally easier loan qualification standards.

Investment property owners under the Senate plan -- S. 1429, "The Taxpayer Refund Act of 1999" -- would be allowed to write off (amortize) improvements over 15 years instead of the current 39-year depreciation schedule. Should this change pass, the effect would be to encourage property revitalization and speed investment returns.

Both bills would raise the standard deduction for married couples to $8,600, $1,400 more than the current $7,200 write-off. The importance here is lower tax bills for entry-level households and those who have paid down mortgages over time.

Each bill provides capital gains tax relief. The House measure would cut the tax rate for investments held at least a year from today's 20 percent to 15 percent. The Senate approach would keep the current rate but exclude the first $1,000 in long-term gains. Given that real estate is routinely held for more than a year and that cash profits over time are commonly greater than $1,000, the House measure is to be preferred.

Both bills attempt to exclude middle-income taxpayers from the "alternative minimum tax," or ATM. The ATM is a set of mysterious and convoluted calculations designed to assure that everyone has some tax liability, especially the rich. As written, however, the ATM often impacts even those with relatively modest incomes.

The House bill would allow the self-employed to deduct all health insurance premiums by the year 2000 instead of the year 2002 as the rules now allow. This is an especially important issue in real estate because virtually all brokers and salespeople are self-employed. Why a corporation should be able to write off health insurance costs but not the self-employed is an unfairness in the system.

Both bills would make retirement contributions easier -- good news for everyone, especially when one consider that IRA money can now be used to help individuals buy a first home.
Perhaps the most interesting issue concerns the matter of inheritances. The House wants to repeal inheritance taxes over the next ten years, while the Senate wants to eliminate taxation on the first $1.5 million left to heirs.
This is a complicated matter because lawmakers want to allow the inheritance of family farms and small businesses. At the same time, there is a populist discomfort in the notion that someone is entitled to millions and even billions of dollars merely because of the accident of birth.
Oddly enough, news from Europe may impact this matter.
According to The Sunday Times of London, Bill Gates is expected to establish the world's largest charitable trust, an entity with assets of roughly $100 billion that will be used to enhance healthcare worldwide. As for his two children, the article states that each will receive about $10 million.
Given such guidance, perhaps Congress should allow the inheritance of up to $10 million per child -- and tax the rest.
As always with tax issues, wait to see what finally passes -- if anything -- and then consult with a tax professional.
Question Of The Week
Q If I work for a broker and leave to go with another firm, can I take my listings with me?
A In the usual case, a salesperson or associate broker works "under the authority" of a broker, and listing agreements are actually arrangements between brokers and consumers, not agents and members of the public.
That said, in the event of a dispute it would be wise to consider state regulations which address the issue, court rulings, and the understandings in any engagement agreement you may have with the broker.
As well, both parties need to consider the best interests of each client, interests which should come first.
For specifics, please see an attorney in the jurisdiction where you practice.
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