Legislation promoted by House Republicans to implement their Contract With America and scale back the size of government could have a significant impact on the housing and real estate industry, but the key bills are likely to encounter strong resistance in the Senate and from the White House.
On the tax side, the GOP leaders pushed a bill through the House Ways and Means Committee that would cut capital gains taxes and provide an inflation adjustment for depreciation.
For individual taxpayers, the bill would provide a deduction of 50% of net capital gains, producing a maximum of effective capital gains tax rate (for taxpayers in the top 39.6% bracket) of 19.8%. This provision would apply to taxable years ending after Dec. 31, 1994. The pre-1986 rule requiring $2 of long-term capital loss to offset $1 of ordinary income would be reinstated for losses in taxable years beginning on or after Jan. 1, 1996.
The bill would also provide for the indexing of the basis of capital assets and property used in a trade or business and held by the taxpayer for more than three years. This provision would apply to property acquired after Dec. 31, 1994
For corporate taxpayers, for taxable years ending after Dec. 31, 1994, the bill would provide a capital gains rate of 25% if that is less than the corporation's regular income tax rate.
The depreciation changes would create a new neutral cost recovery system (NCRS), which taxpayers could elect to use on a property-by-property basis for property, including real estate, placed in service after Dec. 31, 1994.
Under NCRS, the depreciation deduction otherwise allowable would be adjusted to account for inflation. Specifically, the deduction for any year would be increased (but not decreased), according to the change in the gross domestic product price deflator between the year the property was placed in service and the year of the deduction. Asset indexation would not be permitted for NCRS property.
The bill would also modify the depreciation of leasehold improvements, treating improvements made by lessors the same as those made by lessees. A lessor which disposes of an improvement at the end of a lease term would be allowed to recover the adjusted basis of the improvement at that time.
Another Contract-related bill passed by the House would compensate property owners for certain so-called regulatory takings by the federal government.
Specifically, an owner would be entitled to compensation if endangered species or wetlands regulations reduce the fair market value of any portion of his property by at least 20%.
If the regulatory action causes a reduction in value of more than 50%, the owner could require the federal government to buy the affected portion of the property for its fair market value.
No compensation would be required for restrictions on any use of the property that is prohibited by local zoning or that is considered a nuisance under state law.
Probably the most controversial action taken by the House was the passage of a bill to rescind $17 billion of previously appropriated funds, of which $7.2 billion would come from programs of the U.S. Department of Housing and Urban Development.
The HUD cuts include $5.7 billion from assisted housing, which would eliminate any funding for incremental, or additional, Section 8 rental vouchers and certificates. It would also wipe out available funding for the Low-Income Housing Preservation and Resident Homeownership Act, which was intended to keep Federal Housing Administration-insured Section 221(d)(3) below market interest rate (BMIR) and Section 236 projects in the low-income inventory.
The elimination of LIHPRHA funds would apparently allow owners whose projects have passed their 20-year lock-in period to prepay the mortgage and convert their project to other uses.
The bill would also rescind $115.5 million in Section 515 rural rental housing funds.
There is little likelihood that the rescission bill will become law in this form, however. Even if the bill makes it through the Senate, President Clinton is considered certain to veto it.