Russell K. Booth says he's happy with the new federal budget and tax bill, and if he's happy, then everyone who owns a home or aspires to homeownership should be happy, too. As he sees it, there's a lot to like about the package.
Why? Because the real estate industry received tax cuts while other industries got tax hikes."We didn't get everything we wanted, but we clearly have something to cheer about," said Booth, a Salt Lake commercial real estate broker for Mansell and Associates who is also president of the 720,000-member National Association of Realtors.
The new budget and tax bill provides $91 billion in tax cuts over the next five years and a good share of that relief will be for homeowners and the real estate industry.
The legislation increases to $500,000 the amount of profit a couple can receive tax free on their principal residence, regardless of their age. Singles can exclude up to $250,000. That means homeowners will no longer have to "roll over" the proceeds from selling their home into a new home of equal or greater value. It's effective date is May 7, 1997.
Nor does the homeowner have to wait until age 55 to get the tax-free gain as required under the previous law, but the owner must have used the home as a principal residence for two of the preceding five years. The exclusion does not apply to vacation or second homes.
"This is a bold and dramatic simplification of current law," said Booth. "It marks one of the very few times that the often-competing objectives of fairness and simplicity meet and work together to benefit taxpayers."
For first-time buyers, there is a provision to allow penalty-free withdrawals of up to $10,000 from Individual Retirement Accounts and 401k plans to use for down payments and closing costs. Booth believes this will help many young people overcome the biggest barrier to homeownership, lack of sufficient cash for the down payment and closing costs.
The tax package also includes expanded estate tax relief. The exemption on estate taxes increases to $1 million, up from the previous $600,000, to be phased in over 10 years. For those with family-owned farms and small businesses, the exemption is $1.3 million.
For self-employed real estate professionals, who often have to pay their own health insurance premiums, the bill allows 100 percent deductability for those premiums by 2007. Formerly, only 30 percent of health insurance costs were deductible from federal taxes.
Commenting on the rules for deducting for home offices, Booth said Realtors who work from home will want to check with their tax advisors to see if the bill's clarification of the rules will lower their taxes.
The NAR also lobbied hard for capital gains tax relief for investment real estate. While they fell short of their goals, they didn't strike out entirely.
"We asked for a meaningful capital gains tax cut that treats real estate equally with other assets," said Booth. "We got the meaningful part (but) we fell short of the equal part."
The tax overhaul back in 1986 increased the capital gains tax from 20 percent to 28 percent in what was a major blow to the real estate industry. Since then, the NAR has lobbied hard to undo the damage. They came close in 1995 with a bill passed by Congres but vetoed by President Clinton.
Booth said the NAR didn't get all of the capital gains tax relief it wanted in the bill, but it got some. Overall, the capital gains tax rate was reduced from 28 percent to 20 percent (10 percent in the 15 percent bracket) and is effective for sales or exchanges on or after May 7, 1997.
Investment real estate sold after May 7 is subject to a blended rate, which means capital gains tax relief will vary depending on when the property was acquired, how much depreciation has been taken and how much the property appreciated in value.
The holding period for all assets increased from one year to 18 months and is effective for sales or exchanges after July 28, 1997.
The depreciation recapture tax rate on depreciation taken in prior years was reduced from 28 percent to 25 percent and is effective from May 7, 1997. Booth said this translates into a $3 billion savings for real estate owners and investors and was among the NAR's hardest-fought victories.
Special rules to become effective after Dec. 31, 2000, provide for an 18 percent capital gains rate (8 percent in 15 percent bracket) for assets held five years or more. To qualify for the 18 percent rate, though, taxpayers must satisfy some complex rules.