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Waiting for the $5,000 tax credit

With a major tax bill taking shape on Capitol Hill, realty brokers, home builders and lawyers say growing numbers of clients are putting on the brakes _ postponing purchases and sales until they see what Congress actually produces.

"We're getting phone calls from all over the country," said a top executive of the National Association of Realtors. "People are asking how do we know when it's safe to close on a house to be eligible for a first-time home buyer's tax credit? How do we know what the effective date will be for any capital-gains tax (cut)?"

"People are postponing closings and walking out of deals," he said. "We've got a real chilling effect going on right now."

From a tax-savvy consumer's perspective, there's plenty of reason to be cautious about Congress and effective dates. By closing a home purchase before some arbitrary, yet-to-be-announced date, buyers could indeed miss eligibility for a $5,000 tax credit _ $2,500 off the bottom line of their IRS 1040 forms for the next two years.

Some purchasers, builders and brokers assume that Feb. 1, 1992, is cast in concrete as the effective date for President Bush's proposed $5,000 credit plan. His bill covers first-home purchases through Dec. 31, 1992. But on Capitol Hill nothing comes in concrete, especially in election years. The president's original bill _ the Republican tax relief legislation for 1992 _ is virtually guaranteed to go down to defeat in a partisan vote on the House floor.

A Democratic alternative to the president's bill is also likely to fail on the floor, according to congressional staff sources. The Democratic legislation is certain to call for higher marginal tax rates for upper-income individuals.

A third measure, expected in March, is the one to watch for effective dates on housing and capital gains issues. It should carry the key political compromises reached by the administration and the Democratic leadership. But there are no guarantees that the Feb. 1 date for the credit will end up in that version.

For that matter, say longtime tax committee staff members, the entire 1992 tax bill writing process could blow up. As one staff member put it, "The president has backed himself into a tight political corner on capital gains and tax rates." If he can't deliver the former and hold down the latter, there may be no tax legislation whatsoever.

So what do you do as a prudent buyer or seller, facing imponderables like these? What's the right strategy for taxpayers interested in qualifying for Individual Retirement Account (IRA) down payments, or other proposed benefits?

For starters, don't hold your breath for President Bush's 15.4 percent capital gains plan. Congressional Democrats are very convincing when they say the president's deep capital-gains cuts were D.O.A on Capitol Hill. But a more modest compromise plan _ with a top rate in the 21 percent to 22 percent range for assets held three years or more _ may be in the cards, the same Democrats agree. If you have the luxury of postponing a transaction until you see the effective date, do so. You could save 6 percent to 7 percent off the current top rate of 28 percent. Otherwise, don't postpone anything.

The tax credit for first-time home buyers is a shoo-in for any 1992 tax bill. The bipartisan political momentum behind it is too strong to stop, say congressional staff members. Potential buyers, though, should keep an eye on major national mortgage lenders like the Federal National Mortgage Association (Fannie Mae) and Federal Home Loan Mortgage Corp. (Freddie Mac). Reportedly they are exploring ways to "front-load" the tax credit _ that is, to convert the $5,000 credit due from Uncle Sam in later years into immediate down payment cash for a conventional mortgage this year. That would make the credit concept more workable for cash-poor first-time buyers in most markets.

What about penalty-free IRA down payments? Staffers give it a 60 percent to 70 percent chance of making it into a 1992 tax bill _ with parents and grandparents eligible to pull out $10,000 apiece to help pay the down payments of their children and grandchildren.

1992, Washington Post Writers Group