Congress studies bills to foster renovations

Nation's Housing

Federal tax returns, lower rates included

April 04, 1999|By Kenneth R. Harney

HUNDREDS of thousands of homebuyers nationwide could qualify for up to $40,000 in federal tax credits or discount mortgage rates under the terms of major new housing-renovation proposals introduced in the House and Senate.

The virtually identical new bills (H.R. 1172 and S. 664), sponsored by senior members of the tax-writing committees of both houses, already are attracting strong bipartisan support, and are rated good bets for passage this session.

Both measures offer financial incentives to people who want to buy and fix up older townhouses, detached homes, condominiums, cooperatives and rental apartments in historic neighborhoods of small towns and big cities in every state.

The idea, according to supporters, is to bring back residential activity and life to urban neighborhoods that lack a key resource -- fresh, new private investment from property owners.

Companion bills sponsored by two Republicans, House Ways and Means Committee member Rep. E. Clay Shaw Jr. of Florida and Senate Finance Committee member John H. Chafee of Rhode Island, would allow:

Homebuyers in historic neighborhoods to take 20 percent federal tax credits up to $40,000 against their rehabilitation expenses on properties they fix up and live in. Tax credits come right off the bottom line of your federal tax return, unlike de- ductions. If y ou owed $20,000 in federal taxes and had a $20,000 tax credit, you'd pay no taxes.

Moderate and lower-income buyers in such neighborhoods to convert their tax credit eligibility into more immediately useful financial incentives, such as interest-rate reductions on their mortgages, or lower down payments. Mortgage assistance would be preferable for buyers with moderate incomes because they typically don't have large enough tax liabilities to make quick use of credits.

Both bills would require purchasers to follow federal guidelines on their rehabilitation expenditures and to use the properties as their principal residences for at least five years.

How might this legislation work for you, assuming passage?

Here are two possible outcomes: Say you and your spouse are baby-boomer, suburban homeowners with kids rapidly departing the nest. Thanks to federal capital-gains tax changes enacted in 1997, you have no tax constraints on selling your current home and pulling out all your profits tax-free -- at least up to $500,000.

For years you've admired the architecturally distinguished old homes in a charming historic neighborhood that's convenient to cultural attractions, entertainment, transportation and your office. Some of the 70- and 80-year-old houses in the neighborhood already have been bought and restored by new owners. But others are rundown, poorly maintained and in need of major help. In their current "unrestored" condition, they carry lower sales prices, and promise substantial capital gains to anyone who renovates them with care.

You and your spouse decide to buy one of the rundown, high-potential houses and use the new federal tax credit concept. Rehabilitation costs turn out to be sobering -- $200,000 -- for everything from extensive structural repairs to a meticulous return of the facade to its original, historically correct appearance.

Assuming you follow the federal guidelines on your renovations, move into the property and use it as your principal home, you could qualify for as much as $40,000 ($200,000 x .20) off your federal income tax bill. If you needed to, you could take the credit in stages -- $20,000 the first year, $10,000 the next, $5,000 the next and $5,000 in year four.

Here's a second possibility. Say you're a family with a moderate income, modest tax bill, and no need for a tax credit. But you want to buy and renovate an inexpensive, poorly maintained old house in a historic district. Renovation estimates come to $100,000, which you could finance if the interest rate were affordable. Instead of opting for a federal tax credit, however, you obtain a "historic rehabilitation mortgage credit certificate" worth 20 percent of your qualified renovation expenses -- $20,000. You hand it to your lender, who then works with you to use the $20,000 to "buy down" or lower your mortgage rate to produce a monthly payment you can afford. The lender, in turn, can use the credit certificate to reduce its own tax bill.

The proposals have attracted bipartisan political support on Capitol Hill and are being pushed by an unusually diverse collection of trade groups -- from mayors to bankers, homebuilders and historic preservation advocates. Richard Moe, president of the National Trust for Historic Preservation, calls the bills "our top priority" for 1999. Not only would they "help bring homeowners to urban neighborhoods," he says, but they'd help combat another national problem -- suburban sprawl.

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.

Pub Date: 4/04/99

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