Saratoga News

Tax cut could increase number of homes on the Saratoga market

Legislation should encourage downsizing

Could bring prices down

By Clarence Cromwell

The capital gains tax cut on its way through Congress could give a nudge to the already booming Saratoga real estate market, real estate agents and other industry experts say.

If the tax cut passes, the city will probably see a flood of homes added to the market because the tax break will encourage homeowners to sell houses that have increased in value, move into less valuable houses and pocket the difference--without taking a beating on their taxes.

The tax savings could be sweet enough to lean many homeowners, especially longtime homeowners, in the direction of selling rather than sitting on their nest eggs a few more years.

"The tax incentive will be just enough of an incentive for them to get out," said Julie Chancerelle, media and community relations director for the Peninsula West Valley Association of Realtors.

Lately, PenWest Realtors have been wrestling with owners who are reluctant to sell unless the tax cut passes, Chancerelle explained.

The federal tax measure, in its current form, would make two major changes to the tax codes:

* The measure would allow individuals selling their homes to make $500,000 in untaxable profit. Capital gains beyond the $500,000 would be taxable. Currently, federal tax laws exempt $125,000 of a home sale from taxes, but only for people 55 and older.

* The tax measure would also do away with "rollover provisions" that exempt profits from capital gains taxes if the money is reinvested in other property.

Because of the provision for $500,000 in untaxed capital gains, deleting the rollover provisions won't make much of a difference, said Monte Sereno resident Marc Parkinson, a partner in the San Jose-based accounting firm Petrinovich, Pugh and Co.

"The only people that would get hurt would be people who paid $500,000 for a house and sold if for $1.1 million. They'd have to pay [capital gains] taxes on $100,000," Parkinson said.

Real estate experts agree that the tax break will draw more homes into the market.

Jim Cornish, a partner in the real estate firm Cornish & Carey, was pinch-hitting for the company's Saratoga area manager last week. "I think there are a lot of people that have been reluctant to place their homes on the market in anticipation of some tax relief," Cornish said.

"Overall, it's real-estate favorable," Parkinson agreed, "and you'd see more transactions by my guess." He added that the tax break would be ideal for an older couple seeking to sell a big house that has increased in value and move to a smaller, less valuable house.

"Downsizing will be easier to do, more popular," Parkinson said.

The tax package's impact on Saratoga home prices is anyone's guess. Chancerelle said additional homes on the market will lower prices.

But if prices drop too much, some sellers will hold back and get their tax break later, when they might also get a higher price, said Chuck Nunnally, managing broker of Contempo Realty's Los Gatos office.

Some home-sellers are apprehensive about the bill.

"They have a lot of questions about how it works," Nunnally said. "People want to know if it's retroactive."

How or if the tax cut works depends on Congress and the White House approving the tax package that includes the capital gains tax cut.

The House and Senate approved separate versions of the measure June 26 and 27. The two bills must be merged into one document that can be approved by both houses of Congress and by the White House.

President Clinton has already called for even lower tax rates on the sale of a home.

The rewriting process began last week, after legislators returned from their Independence Day recess, but legislators weren't expected to even begin hammering out a compromise on capital gains until July 11. No agreement had been announced at press time.

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