Tax breaks for fixing up homes have chance of passing this year

Nation's Housing

Bills are pending in House, Senate

May 14, 2000|By KENNETH HARNEY

WHEN owners and buyers fix up their houses, the federal government normally doesn't provide them any special tax breaks or mortgage money discounts.

But under a pair of bipartisan bills pending in the House and Senate, an estimated 1 million owners and buyers across the country could qualify for an attractive new form of renovation tax credit worth up to $40,000 per home.

Alternatively, they could use their credit to cut their mortgage interest rate far below prevailing market levels.

Since the bills are co-sponsored by nearly half the members of the House -- 205 sponsors currently -- and 38 members of the Senate, they have a chance of passing this year, provided the Republican leadership and President Clinton cooperate with each other.

Here's how the new tax credit program would work: As part of a forthcoming urban rejuvenation effort planned by the White House and congressional leaders, tax credit proponents want to focus attention on hundreds of thousands of homes in big-city and small-town neighborhoods that are in need of rehabilitation.

The neighborhoods tend to be among the oldest and most architecturally distinctive of their areas.

They have all been recognized as having historic importance to the community as a whole, and have been designated as such by either state or federal agencies. The neighborhoods are not necessarily "hot" at the moment, in real estate sales terms. But they could be, if houses were restored to their potential by their present owners, or new buyers moved in and remained in the neighborhood.

Under the pending tax credit bills (H.R. 1172 and S. 664), owners or buyers of homes in state or federally designated historic neighborhoods could receive up to 20 percent of their renovation expenses back in the form of tax credits. A fix-up that cost $50,000 would generate a $10,000 credit; a $100,000 project would generate $20,000.

Tax credits come right off the bottom line of your federal income taxes. Unlike deductions, which are most valuable for people in the highest tax brackets, credits work for people at all income levels. They cut what you owe the government dollar for dollar. If you can't use your entire credit in one tax year, you call roll it over and cut your taxes in subsequent years.

Under the pending bills, buyers and renovators of homes could also convert their credits into cut-rate mortgage money. They would receive federal "mortgage credit certificates" that they could provide to their lender to "buy down" their interest rate below the market. The size of the rate reduction would depend on the size of the credit, the size of the loan and how deep a rate cut buyers want.

Builders, developers and contractors could participate in the program as well. They could buy and renovate homes, then sell them for a profit to new buyers with the federal tax credit attached. Builders could not gobble up the tax subsidies for themselves, however, because only resident owners -- people agreeing to live in the home as a principal residence -- could qualify for the credits.

All buyers would be expected to live in their newly renovated homes for at least five years. If they moved out and sold earlier, they would face recapture of a pro-rata share of the tax credits they pocketed. For instance, if you received a $20,000 credit and moved out after 30 months -- half the required 60 months -- you'd owe the IRS $10,000.

The renovations assisted by the tax credits would have to be consistent with guidelines maintained for historic districts by state or federal agencies. That means you couldn't expect a $20,000 tax credit if you bought a home in a neighborhood filled with Victorian-era properties and spent $100,000 turning it into a starkly modern-looking house that stuck out like a sore thumb.

Sponsors of the bills and the National Trust for Historic Preservation estimate that approximately 1 million houses, condos, cooperatives and mixed-use dwellings around the country would be eligible for the new credit today, and that the program would cost the Treasury about $1.2 billion over 10 years. But supporters argue that the economic ripple effects of revitalizing older, urban neighborhoods stimulated by the credits would more than pay back the revenue costs.

Richard Moe, president of the National Trust for Historic Preservation, sees the bills as a way to bring back capital and life to real estate markets that haven't blossomed for decades. But can the legislation pass this session?

Moe says he's optimistic "because the president and Congress both are interested in urban revitalization" this spring. House Republicans are working with the Clinton administration to craft an anti-urban sprawl package and could include the tax credit concept as part of it. With 200-plus sponsors in the House and nearly 40 in the Senate, they'll be hard-pressed to ignore it in an 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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