Chla Proposes New 1031-type Exchange For Young Homebuyers

The Community Home Lenders of America (CHLA) on Tuesday unveiled a tax proposal designed to tap into trillions of dollars of assets locked up by capital gains tax consequences to help children or grandchildren buy their first home.

The national nonprofit says that it released the plan after President Trump recently expressed support for changes to the tax treatment of the sale of a personal residence.

The proposal, which is modeled after the commercial 1031 Starker Exchange concept, would exclude taxes on capital gains on the sale of up to $50,000 in stocks/bonds/mutual funds/publicly traded REITs, or taxable gains on the sale of a principal residence, when the sale proceeds are gifted to a child or grandchild and used by them within six months as a down payment on a first-time home purchase.

While the $50,000 cap is a lifetime cap for each taxpayer, the exclusion may be taken for more than one child or grandchild, subject to the $50,000 cap.

“It makes no sense to have seniors with appreciated stock elect to hold the stock until they die to get the basis step-up and only then pass the assets along to their children and grandchildren,” CHLA said in their proposal release. “This proposal allows the same tax outcome NOW to help their children or grandchildren buy a home.”

To take advantage, an eligible child or grandchild must be a by-definition “first-time homebuyer,” using the same parameters that apply to a penalty waiver for an IRA withdrawal for a first-time home purchase. The purchase price of the home also cannot exceed the FHA single-family loan limit in the area.

The capital gain that is excluded is subtracted from the basis of the first-time home purchase, which would create a new type of Starker (1031) Exchange, with tax deferral. The homebuyer would later pay a capital gains tax if the $250k/$500k principal residence exclusion is exceeded.

“CHLA’s proposal extends the Starker concept from commercial real estate to first-time home purchase — a targeted, tax-efficient way to gain access to trillions of dollars in investments to help the next generation(s) buy a home,” CHLA said in releasing its proposal.

The proposal is just one of many focused on helping to situate first-time homebuyers in the housing market, as the demographic relies on buydowns or specialized programs to break the barrier to entry. In April, the “Affordable Housing Bond Enhancement Act,” introduced by Sens. Catherine Cortez Masto (D-Nev.) and Bill Cassidy (R-La.), was reintroduced into the Senate.