Capital Gains Tax Update

 On August 5th, President Clinton signed historic tax cut legislation that is designed to balance the budget by the year 2002. The bill's big winners include individuals selling their personal residence, real estate investors, and first-time homebuyers. 

Specifically, the tax plan would provide a $500k/$250k capital gains tax exclusion for the sale of a principal residence where the owner has resided two of the last five years. Consequently, home sellers could use the exclusion every two years for an unlimited number of transactions. The proposal would be effective for transactions which take place after May 6, 1997 and would replace the existing rollover provisions as well as the one-time $125,000 exclusion for those over 55 years old. Sellers and buyers who have signed a "binding contract" between May 7, 1997 and August 5, 1997 would be authorized to use either the existing rollover law or take advantage of the new tax provisions. 

Capital gains tax rates would be generally lowered from the current rate of 28% to 20% for those in upper brackets and from 15% to 10% for those in lower tax brackets sold after May 6, 1997. While the difference between the purchase price and the selling price of investment property would enjoy the lower overall capital gains tax rate, gains due to depreciation recapture would be taxed at 25%. Effective July 29,1997 assets must be held at least 18 months to qualify for capital gains treatment. Previously, assets had to be held for a minimum of 12 months to qualify as capital gains. Overall capital gains rates would be lowered even further in 2001, to 18% and 8% respectively, for assets purchased after December 31, 2000 and held five years or more. It should be noted that the plan would not grant a deduction for losses on the sale of a residence. 

Beginning January 1, 1998, the measure allows penalty-free withdrawals of up to $10,000 from existing and newly created "American Dream" Individual Retirement Accounts (IRAs) for the down payment and closing costs of first time homebuyers. Qualified taxpayers would be allowed to place up to $2,000 in savings into the new "AD" IRA account each year but these contributions would not be tax deductible. Earnings build tax-free and are free from taxes on withdrawal, provided the account holder has had the IRA for at least five years and the withdrawal is for a first time home purchase or is made after the holder has reached 59 1/2 years of age. 

Additionally, the tax package includes expanded estate tax relief. Specifically, the exemption on estate taxes would increase to $1 million, from the current limit of $600,000. This would be phased in over ten years. For family-owned farms and small businesses, the exemption will be immediately increased to $1.3 million. 

For self-employed real estate professionals, who often shoulder the cost of their own health insurance, the bill would allow 100 percent deductibility of health insurance premiums by 2007. Currently, only 30 percent of the cost of health insurance is deductible from federal taxation. 

The definition of a home-office also received attention in the tax package. The term "principle place of business" will now specifically include a place of business which is used by the taxpayer for business-related administrative or management activities if there is no other fixed location of the business where the taxpayer conducts substantial administrative or management activities. All of these matters are subject to regulatory interpretation. Therefore, REALTORS® should contact their tax advisor to determine how the new laws will impact them or their clients specifically. 

Hearing Held on Property Rights And Judicial Reform Bill 

In preparation for this hearing, NAR submitted written testimony and sent letters of support to all the members of the Subcommittee. In a related activity, a Senate Companion bill, S. 1204 - The Property Owners Access to Justice Act of 1997, was introduced last week by Sen. Paul Coverdell (R-GA). This bill is the same as H.R. 1534. NAR sent out a Call for Action urging members to ask their Senator to co-sponsor this legislation. No hearing has been set for S. 1204. 

October 6, 1997 

Gallegy Private Property Rights Bill Successfully Moves Through House Subcommittee 

CONTACTS: Joe Maheady 202-383-1097, Russell Riggs 202-383-1259, Jamie Gregory 202-383-1027 

Short Sales and HUD Title I Loans

 As second, non-purchase money mortgages, borrowers do not enjoy anti-deficiency protections when obtaining Title I loans. HUD Title I loans in excess of $7,500 must be secured by a recorded lien against real property. Because they are not protected by the anti-deficiency rules, foreclosure on this real property will not eliminate Title I debt. This debt can follow the borrower even after he/she no longer owns the home securing the debt. The debt becomes a “debt owed to the United States.” 

One problem with Title I loans is that, when an underwater borrower has one, it can make negotiating a short sale difficult. The same is true in most situations when a second mortgage exists. In the case of a Title I loan, however, the problem is exacerbated since the incentive for a HUD I second mortgage holders to “work out” their loan is reduced since the loan is insured by HUD. 

 Research has shown that HUD I loans can be negotiated and liens released but that it takes a lot of work. Typically, the HUD I holder may demand that half the existing loan balance be paid by the borrower to release the lien (although, like with everything else, this figure is negotiable). A repayment plan (sometimes unsecured, sometimes secured by a borrower’s other property) is then typically worked out for the remaining balance. 

 When a HUD I lender is resistant or refuses to negotiate the best course of action can be to go to HUD itself. Current HUD Title I loans in California can be negotiated through the HUD Asset Recovery Center in Seattle at (206) 220-5313. Defaulted HUD I loans (loans where the borrower defaulted and original lender has been paid by HUD) can be negotiated with HUD Headquarters in Washington at (202) 708-6396. 

MORTGAGE BROKER DISCLOSURE RULE PROPOSED BY HUD

While the disclosure would not be required, under the new regulation, mortgage brokers who fail to disclose who they represent and how they are compensated will be subject to increasd scrutiny by HUD and potential liability under the Real Estate Settlement Procedure Act (RESPA) for charging excessive fees. According to HUD, "Mortgage brokers who use the disclosure agreement will be enttled to protection from enforcement action under RESPA unless their fees fall outside parameters to be set when the rule becomes final." 

The rule is HUD's attempt to deal with the controversy that has surrounded the issue of mortgage broker compensation and disclosure in recent years, especially those questioning the legality of yield spread premium-based compensation arrangements. 

A copy of the HUD press release can be found at http://www.hud.gov/pr/97-168.html. A copy of the proposed disclosure form can be accessed at http://www.hud.gov/fha/res/mbctrin.html. 

FHA ARMS On Hold 

The effect of this action on home borrowers is expected to be minimal. Lenders may originate and close FHA ARMs, but they must wait until October to receive their mortgage insurance certificates. HUD will accept paperwork and perform a pre-insurance review, and if there are any problems identified during the review, 

Despite the minimal affect on borrowers, HUD officials say some lenders may hold off a closing until they are able to receive an actual certificate of insurance from HUD. 

ONE-STOP SHOPPING A WINNER FOR AMERICA’S HOME BUYERS 

NAR President Russell K. Booth said the strong consumer sentiment for one-stop shopping points to the need for more clarity and more flexible operating regulations for real estate companies. "No captain wants to pilot a ship through fog," Booth said. "But that's just what the current regulatory atmosphere has created. Today's consumers want to make the most of their time. Real estate companies can best meet consumer needs if they are permitted to bundle settlement services without being burdened by undue government oversight," he added. 

Booth discussed the issue today during testimony before the Senate subcommittee on financial institutions. The subcommittee is part of the Senate Banking Committee. 

The bundling of settlement services can include the provision of virtually any function associated with the home buying and selling process -- from title insurance to pest control. 

The survey's results show a strong preference for operations that streamline the home buying process by giving consumers the option to have one company perform several steps. The appeal of receiving some or all services through one firm was strong among buyers who had previously used limited-service companies, even though most were pleased with the results of their last purchase. 

However, regulatory barriers have induced a chilling effect on real estate firms that would otherwise explore the possibilities of one-stop shopping. 

The U.S. Department of Housing and Urban Development (HUD) has proposed a regulation implementing the Real Estate Settlement Procedures Act (RESPA) that would prohibit or severely regulate a real estate firm’s ability to pay employees for marketing mortgages or other settlement services of affiliated real estate companies to consumers. The regulation, currently scheduled to take effect after July 31, would also place confusing requirements on joint ventures and other partnerships between real estate firms and settlement firms. 

NAR is seeking a revision and a delay in the regulation until Congress has the opportunity to work with industry experts to come up with a workable regulation reflecting the needs of today's marketplace and providing consumer safeguards. RESPA was first enacted in 1974. 

"This rule needs to be changed," said Booth. "NAR has joined several other real estate groups to seek changes that streamline RESPA and reduce confusion in the industry. We understand the need to protect consumers, but it’s time we added consumer satisfaction to consumer protection," he added. 

The survey also found that even after respondents heard arguments against one-stop shopping, they still favored changes in federal regulations that would make it easier for real estate companies to offer a variety of services. Common arguments against one-stop shopping include consumers not knowing whether they are getting the best price for each service provided, the possibility that consumers might pay more for convenience, and the prospect that control over the purchase might shift from the buyer to the real estate company. 

 The survey, conducted by Hart-Riehle-Hartwig in Washington, polled more than 800 people nationwide who have purchased a home within the past year or two. 

For more information, please contact Robert Leavitt , N.A.R. Media Relations, 202-383-1000. 

HUD TO DELAY RESPA RULE

EXPANDED BANK POWERS