The following is an overview of some of the issues of the 1990 Budget Reconciliation Revenue Act. On a whole, real estate took a relatively light hit.
Deductions for Mortgage Interest and Real Property Taxes. These deductions -- available only to homeowners -- will be trimmed indirectly for some taxpayers by a provision in the federal budged deficit-reduction agreement that disallows $300 in itemized deductions for every $10,000 of a taxpayer's income above $100,000 a year.
No more than 80 percent of the total deductions can be disallowed, however, and certain deductions, such as the deduction for medical expenses, will be exempted. The itemized deductions provision will take effect for the tax year beginning January 1, 1991.
Mortgage Revenue Bonds. The mortgage revenue bond and mortgage credit certificate programs, which expired September 30 -- the end of fiscal year 1990 -- were extended through December 31, 1991.
The mortgage revenue bond program allows state and local housing authorities to issue tax-exempt bonds to provide below market interest rate mortgages for qualified first-time home buyers. Under the mortgage credit certificate program, eligible first-time buyers are allowed a federal income tax credit aimed at reducing their tax liability.
Both programs were extended with modified recapture tax provisions that apply if properties purchased with MRBs or MCCs are sold within 10 years of the purchase date.
Low-Income Housing Tax Credit. The tax credit for investors in low-income housing was renewed through December 31, 1991 in the budget legislation. The credit had expired September 30 of this year.
Rental Property Losses. Congress took no action on proposals that would have allowed taxpayers, who can prove that real estate is their primary business, to deduct rental real estate losses from their gross income.
Department of Veterans Affairs User Fees. The new federal budget calls for an increase from 1.25 percent to 1.75 percent in the up-front guarantee fee borrowers must pay on Department of Veterans Affairs-guaranteed loans. The fee can be financed over the life of the loan. It is set to expire September 30, 1991.
Capital Gains Tax Rate. The budget deficit-reduction agreement sets the maximum capital gains tax rate at 28 percent, creating a differential between this rate and the new top marginal personal income tax rate of 31 percent. The property must be held at least one year to qualify.
The 1986 Tax Reform Act had abolished the idea of a lower capital gains tax, instead requiring that the taxpayer's capital gains be taxed at the same rate as ordinary income. The new top rate on ordinary income is 31 percent. That is, there are now three tax rates: 15 percent, 28 percent and 31 percent. For 1991, the 31 percent rate will kick in at $49,200 for singles and $82,050 for married people filing jointly.
Alternative Minimum Tax Rate. The new alternative minimum tax rate will be 24 percent up from 21 percent.
The effective date of these changes regarding the favorable Capital Gains Tax Treatment and Alternative Minimum Tax, is January 1, 1991. This date should be confirmed because of conflicting reports.
Russell J. Gullo, CCIM, is a Certified Exchange Adviser and president of R. J. Gullo & Co., Inc.