WASHINGTON -- Congress' calamitous budget breakdown Oct. 5 had side effects on homebuyers and real estate investors that get lost in the headlines over capital gains and income tax rates.
Several bipartisan pieces of heavily co-sponsored legislation aimed at helping first-time purchasers and small investors failed to survive the initial explosion of the budget process on Capitol Hill.
Among the victims -- with virtually no chance of revival this session-- were bills providing down payment relief for first-time home purchasers, and legislation to exempt active real estate investors from the "passive loss" tax rules. A bill to achieve the latter objective was endorsed by 320 co-sponsors in the House of Representatives alone.
The first-time buyer legislation had stirred up significant popular interest around the country, especially in high-cost markets where down payments represent huge impediments for renters seeking to purchase a home.
Though Democrats and Republicans had introduced separate bills, the center of debate on the House side came from the Bush administration itself. Its down payment-assistance legislation (HR 3972) had the co-sponsorship of the entire Republican membership of the tax-writing Ways and Means Committee.
Among its key features:
* If you had not owned a house at any time in the last three years, you'd be eligible to withdraw up to $10,000 from an existing tax-deferred Individual Retirement Account (IRA), without the current statutory 10 percent penalty for making a premature withdrawal. The money would have to be used as part or all of the down payment to purchase a home.
* Only principal residences -- not vacation or second homes -- could qualify. The down payment could be contributed toward the construction of a new home or the purchase of a resale property.
* Cost restrictions, but not income restrictions, would apply. You could not use the tax-assisted down payment cash to buy a home that exceeded 110 percent of the median price of houses in your market area. Since the majority of first-time buyers' "starter" homes cost well below the median, this restriction would not have excluded many potential beneficiaries.
Democratic-sponsored alternatives to the Bush plan widened its scope even further. One bill would have permitted parents and ** grandparents to tap their own IRAs -- penalty-free -- to contribute $10,000 to $20,000 toward a child's or grandchild's first home purchase.
A prominent variant of the down payment-assistance plan had ** been pushed hard by the Senate Finance Committee's chairman, Sen. Lloyd Bentsen, D-Texas. It would have eliminated Bush administration restrictions on the size of down payment contributions and home-cost ceilings. If you had $40,000 in your current IRA or a 401(k) retirement-plan rollover account, and you
needed $20,000 to buy a $175,000 first home, Bentsen's bill would have given you the green light.
But what happened to 1990's crop of down payment bills, which had been given excellent prospects for passage as late as this summer?
A Democratic committee staff member put it this way: "Once the [budget legislative] process turned into a summit process, all the political bets got thrown out the window." Tax-deferred down payment assistance was a net revenue loser, by Treasury estimate, not a revenue producer.
The same fate met the industry's "Cinderella" tax bill of the 1990 session. Sponsored by Representative Michael Andrews, D-Texas, and Representative William Thomas, R-Calif., the bill would have revised the controversial "passive-loss" rules governing real-estate taxation.
The legislation would have allowed any taxpayer who spent 500 hours a year actively working on real estate holdings or investments, and spent at least 50 percent of his or her working hours engaged in some form of real estate activity, to escape the 1986 passive-loss rules.
1990, Washington Post Writers Group