GOP plan features goodies for homeowners, buyers

March 19, 1995|By Kenneth R. Harney

Washington -- The newly unveiled "Contract with America" tax reform package appears to offer substantial goodies for homeowners and first-time buyers. But how would they apply to you? And are they actually as generous as they look at first glance?

Here's a quick overview of key housing provisions in the House Ways and Means committee bill introduced March 9.

Tops on the list is the creation of a new form of Individual Retirement Account (IRA) that goes by the name "American Dream Savings Account," or ADS for short. You'd be able to put aside up to $2,000 ($4,000 for married couples) into an ADS. Unlike a regular IRA, which allows you to avoid taxation on retirement contributions but taxes you later on with drawals, an ADS would be nondeductible upfront. Withdrawals made for the purchase of a first home five years after you open the ADS account would be tax-free -- an option not permitted under current law.

It sounds like a helpful way for a young, working couple to accumulate funds for a first down payment. At the very least, it would avoid the 10 percent penalty now levied on IRA withdrawals before the age of 59 1/2 .

But there's an important element for homebuyers missing from the fine print of the House leadership's IRA reform: The bill would not allow parents or grandparents to tap their own retirement funds -- IRAs or 401(k) employee benefit plans -- to help their children or grandchildren with a down payment.

Contrast that with the two other major reform plans on the table -- the Clinton administration's fiscal 1995 tax proposal and the bipartisan Senate bill sponsored by Sens. William V. Roth, R-Del., and John B. Breaux, D-La.

The Clinton plan would permit you as a parent or grandparent to withdraw funds from an IRA -- but not a 401(k) plan -- to help with the kids' or grandchildren's first home purchase. The Roth-Breaux bill would go one step farther, and open IRAs and 401(k) plans to penalty-free "cross-generational" withdrawals for use in first-time home buying.

The bottom line here if you're a potential first-time homebuyer in the coming year or two: If the House provision makes it into the tax code, you've got to accumulate IRA funds on your own for five years before dipping in for a penalty-free down payment withdrawal.

If either the Clinton or Roth-Breaux provisions becomes law, by contrast, you'll have new resources open to you virtually immediately. Under Roth-Breaux, a parent with even a modest-sized 401(k) plan could take out the $5,000 or $10,000 you might need to add to your down payment. Unlike today, the parent or grandparent wouldn't have to worry about a 10 percent early withdrawal penalty on top of his or her regular tax.

Some other noteworthy items in the House Republican tax plan:

* Capital gains tax relief when you lose money on the sale of your principal residence. You'd be able to treat your home sale losses as capital losses.

* A capital gains exclusion of 50 percent for all individual taxpayers. This should be of interest to investors in real estate who currently face a 28 percent tax on gains from property sales but could see that cut in half under the new bill.

Will any of this actually come to pass this year? Good question. But unlike other minefields on Capitol Hill, there are strong political motivations for Newt Gingrich, Bill Clinton and Bob Dole to get a middle-class tax-relief measure into law before the end of 1995. Some form of tax bill, with at least a handful of goodies for homebuyers or owners, is a good bet this pre-presidential election year.

Kenneth R. Harney is a syndicated columnist. Send letters care of the Washington Post Writers Group, 1150 15th St. N.W., Washington, D.C. 20071.

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