Seeking $200-million more per year for the Treasury, congressional tax-law writers want to tap into "creative-financing" deals cut among nearly 5-million home buyers and sellers. That's the upshot of new legislation introduced on Capitol Hill and backed by a study from the General Accounting Office (GAO). The study concluded that 4.8-million individual home buyers and sellers participate in creative, seller-financing arrangements on their homes. The problem, according to the study, is that not enough of them report their interest income and interest deductions correctly to the Internal Revenue Service.
Some of the sellers report little or no continuing income from loans they have made to the buyers of their homes. Some of the buyers, in turn, exaggerate their deductible interest payments. The net loss to Uncle Sam from home-seller financing per year, according to the GAO, may be $200-million in taxes.
To correct this problem, one of Congress' senior tax committee members has just introduced legislation banning deductions of mortgage interest by seller-financed home buyers who haven't included the Social Security number, name and address of the home seller.
The bill (H.R. 2416) was offered by Rep. Frank J. Guarini, D-N.J., a member of the tax-writing House Ways and Means Committee. It would affect any home-buying taxpayers who receive "any" financing from the home seller _ whether it is a first mortgage, second deed of trust or third mortgage _ unless the required information about the seller is provided on their tax returns.
Under current law, seller-financed home buyers are supposed to report the name and address of the home seller on annual tax filings, but the GAO says that, in a significant number of home buyers' returns studied, the sellers' names were illegible, or addresses were incorrect or missing.
What makes the new bill significant is that it takes direct aim at one of the most popular techniques for buying and disposing of homes on affordable terms in slow markets. Seller financing can take almost limitless forms and terms.
For example, say you want to buy your first home but don't have the full down-payment cash needed to swing conventional mortgage financing. You find a $100,000 house with an existing Federal Housing Administration (FHA) loan on it of $65,000. The mortgage is assumable _ that is, you can take it over at its current interest rate _ but you have only $10,000 cash, hardly enough to bridge the $35,000 gap between the selling price and the FHA loan.
The seller provides you the answer: She will give you a $25,000 second deed of trust or mortgage. The term will be for five years, with interest-only payments, due monthly at 9 percent. The seller is deferring part of her sale price, in effect, in order to make the deal go through.
Under Rep. Guarini's bill, you as a home buyer could not deduct the interest you pay on the $25,000 mortgage unless you reported the seller's Social Security number, name and address to the IRS.
Many seller-financed home purchase loans are large, according to the GAO study, with annual interest payments of $5,000 or more. In some cases, upper-bracket luxury homes carry seller "take-back" loans of $50,000, $100,000 and higher. With nearly 5-million taxpayers a year now reporting some form of home-loan seller financing, according to a congressional staff member, "We've got to go after any pot of money like this with $200-million in it."
Without congressional statutory sanction, the IRS legally is prohibited from requiring home buyers to obtain and then pass on the Social Security numbers of home sellers. The GAO believes that, with Social Security identifications in IRS computers, tax collectors will be able to match returns with ease, as they do in other categories, like alimony payment deductions, child-care tax credits and dependent exemption claims.
Under a Social Security identification matching system, the IRS would be able to peek into transactions electronically. If, for example, seller "A" reported no mortgage interest income for 1991, but buyer "B's" return says she paid $8,000 in interest to seller "A" in the same year, IRS could spot it by computer. Under current procedures, that's often impossible.
Guarini's bill has a good chance of being adopted this congressional session.