Gephardt's mansion by the sea

Nation's Housing

March 10, 1996|By Kenneth R. Harney

WASHINGTON -- A Capitol Hill ethics flap over a congressman's oceanfront mansion and a tax-free exchange is focusing new light on how well-connected vacation home buyers play the real estate game for fun and profit.

Until last month, the home -- named Northern Star -- was co-owned by House Democratic leader Richard A. Gephardt of Missouri and his wife, Jane. How Representative Gephardt acquired Northern Star -- and how he defined it to his mortgage lender, the IRS and to Congress -- are the keys to the flap.

In December 1984, the Gephardts purchased a house for $115,000 in the barrier-island village of Duck, N.C. After renting it out for several years, they parlayed their piece of the beach into something bigger. In early 1991 they sold it for $183,000. But rather than face capital gains taxes, the Gephardts did what many investors do. They opted for a tax-free exchange under Section 1031 of the federal tax code.

The property they obtained in exchange was a vacant lot selling for $375,000 in Corolla Light, N.C. Under the rules of Section 1031, the property had to be held for business or investment purposes, not for personal use. In February 1992, the Gephardts sold a 50 percent interest in the Corolla lot to a Maryland couple with whom they were friendly. Price: $195,000.

That summer, the Gephardts and their co-owners received a $493,100 loan from a federally insured savings bank based in Norfolk, Va. -- CENIT Bank. Part would fund the construction of Northern Star, and the balance went to the lot's seller. But the deed of trust contained this express requirement, initialed by both couples: "Borrower shall only use the property as borrower's second home."

Had the partners not agreed to that clause, according to an official at CENIT Bank, they would have had to pay higher fees and shell out a bigger down payment to close the deal. Once the house was built, however, it was put on the rental market, generating substantial income. Now for the controversy. According to an ethics complaint filed in February by Rep. Jennifer Dunn, a Washington Republican, Gephardt characterized his Outer Banks real estate ventures very differently to the IRS, Congress and to his bank:

In a 1992 amendment to his 1991 financial disclosure statement, Gephardt said he neglected to include information about the exchange of his $183,000 Duck house because it was a "personal residence a secondary residence or vacation home" that "was not used for rental purposes" in 1991. But "to qualify for a tax-free exchange in the same year," Dunn said in her complaint, "he characterized the same property as being held for investment purposes only." Therefore, she said, Gephardt "has either violated the Ethics in Government Act or the Internal Revenue Code."

In Gephardt's 1992 congressional financial disclosure, said Dunn, he "characterized the Corolla Light property as being held for investment purposes only. However, in order to close a bank loan in the same year he characterized the same property as a secondary home." As a result, she said, Gephardt "has either violated the Ethics in Government Act or made a false statement on a bank loan document."

A Washington attorney representing Gephardt, Robert F. Bauer, calls Dunn's ethics charges "baseless." The "confusion," Bauer said, stems from a misunderstanding about how a single piece of real estate can be characterized differently under the rules imposed by different federal laws.

The loan paid off, the Gephardts recently transferred their half-interest to their partners.

Pub Date: 3/10/96

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