Rental property could be socked with a new levy


September 17, 1995|By Kenneth R. Harney

Washington -- The prospects for significant new tax benefits for homebuyers and owners brightened recently on Capitol Hill. But investors in income-producing real estate -- ranging from small rental houses to downtown office towers -- could face a new worry: To balance the federal budget, the Senate could hit them with an unexpected new tax levy.

Here's what's happening. The abrupt, dramatic change in the chairmanship of the Senate Finance Committee caused by the resignation of Sen. Bob Packwood of Oregon has important ramifications for housing.

The new chairman, Sen. William V. Roth Jr., a Delaware Republican, is a longtime advocate of expanding homeownership through selective changes in the federal tax code and banking laws.

By contrast Packwood, whose resignation from the Senate takes effect Oct. 1, has called for cutbacks in the home mortgage interest deduction and personally authored the controversial "passive loss" system for rental real estate in the Tax Reform Act of 1986.

The passive loss concept generally prevents owners of rental real estate from writing off losses incurred by their properties against their regular income.

Though congressional tax experts caution against expecting radical alterations in the shape of the Senate's 1995 tax legislation, they agree that housing policy may be one area where Roth's presence as chairman makes a real difference.

For example, since this spring Roth has pushed this year's most generous Individual Retirement Account (IRA) reform bill for new homebuyers -- one that goes well beyond even the American Dream Savings Account passed by the House as part of the Republican Contract with America. Roth's plan is co-sponsored by Sen. John B. Breaux, a Louisiana Democrat.

The new House program would allow you to put aside up to $2,000 ($4,000 for a married couple) into a new "dream account." Five years after establishing the account, you'd be able to tap it to withdraw funds needed for a down payment on your first home purchase. Unlike a current IRA, you'd avoid the 10 percent penalty now levied on withdrawals before the age of 59 1/2 .

Roth's bill takes a sharply different approach -- one likely to help far larger numbers of young families come up with down payment cash. Under the Roth-Breaux plan, parents and grandparents could make "cross-generational," penalty-free withdrawals from their IRAs and 401(k) retirement accounts to help their children or grandchildren with a down payment.

Equally important, there would be no five-year waiting period before the funds could flow, nor any dollar limit on the amount withdrawn.

Under the Roth-Breaux bill, a parent or grandparent -- or a combination of them -- could pull out $10,000 or $15,000 or more from their retirement accounts and help their kids at the very moment they need help most as new homebuyers: When they found the right house, but didn't have the savings to swing the down payment and closing costs.

Roth has been advocating the penalty-free use of retirement funds for first-time home purchases since the 1980s, but has never been in the political position to ensure that the concept got the consideration he believes it deserves.

As one Capitol Hill tax staffer put it, "You can be certain it gets consideration this time around."

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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