Capital Gains Tax Relief Could Be in Sight

1997 could go down as the year of the tax cut.

April 1, 1997

With some form of capital gains relief included in the Clinton administration's proposed budget, the chance for a capital gains tax cut seems better now than in recent years.

The president's capital gains proposals appeal largely to homesellers, but a broader-based capital gains bill introduced by Sen. Orrin Hatch, R-Utah, would benefit commercial real estate owners and investors as well.

Hatch's measure would reinstate a 50 percent exclusion for capital gains income and would effectively reduce the maximum individual capital gains rate from its current level of 28 percent to no more than 19.8 percent. That's the lowest rate since 1986.

Under the current capital gains tax rate, many owners have held on to their properties rather than sell them and take a tax beating, says NAR Chief Lobbyist Steve Driesler. He says Hatch's bill would have a positive impact on real estate sales by ending the stagnation brought on in part by a 28 percent capital gains tax rate.

Jeff DeBoer, senior vice president with the National Realty Committee in Washington, D.C., which represents owners of commercial real estate, says he's concerned about a tax cut that would apply only to profits in excess of purchase price from the sale of a commercial property. Since most commercial and multifamily properties bought in the last 10 years are selling at about their original cost, he says, a capital gains tax cut would be of little value.

"Congress may try to limit a capital gains cut for commercial real estate to a gain above the original [purchase] cost," he says. "When you take depreciation, you reduce your asset and you create gain." DeBoer's group wants depreciation to be treated as it is today--as a capital gain--and not taxed at any higher rate.

Driesler says he fears a two-tiered tax bill that would tax depreciable gain at 28 percent and appreciable gain at 19.8 percent. In that scenario, any tax savings would be "a wash."

"A lower capital gains rate on appreciable gain doesn't do you any good," he adds, "if the only gain you have is due to the depreciation you took and you're still being taxed at the current rate of 28 percent."

DeBoer says he believes a compromise bill, including language from Hatch's and Clinton's proposals, will ultimately make its way through Congress.

In Clinton's proposal, the one-time capital gains exclusion of $125,000 on the sale of a principal residence would be expanded. It would provide for a $500,000 exclusion for each sale of a home that has been a principal residence for two of the last five years.

"We strongly support this proposal because it would benefit all homeowners, not just those over 55, when they sell their principal residence," Driesler says. "They would have the option to trade up to a larger home or down to a smaller home, and their decision would not be swayed by the specter of paying higher taxes.

"This rollover provision is clearly a step forward, and we will work to make sure it is enacted. However, we contend that more favorable capital gains tax treatment is warranted for sales of all real estate, not just principal residences."

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