Effects of capital gains tax removal seen.

A proposal by the Clinton administration made during the presidential campaign to remove the capital gains tax on the sale of a residence is widely thought to be almost meaningless in most markets in the U.S. because of roll-over exclusions and the onetime exemption for people over 55 years old.

But the end of the capital gains tax on residences would have a huge impact on the Manhattan and Hamptons real estate markets, reports Clark Halstead, founder of the Halstead Property Company. The proposal will effect about $1 billion in capital gains in Manhattan per year, based on current rates of appreciation and average holding time for Manhattan properties, statistics tracked by Halstead. But the tax on this $1 billion about $285 million - goes largely uncollected, as sellers have two years to plow the gains back into another property to avoid the tax.

Where the removal of the tax will have the biggest impact is in the market for very expensive properties. Because the one-time exclusion on capital gains tax on the sale of a residence for sellers over 55 years old is capped at $155,000 of gain, properties which exceed this are now liable for the tax. And these properties are common in the multi-million dollar markets of both Manhattan and the Hamptons. The new proposals will primarily help sellers of this property.

"We estimate, given the price appreciation of the last five years, that sellers will save as much as $80 or $100 million in taxes in our markets," said Clark Halstead. "This is money that will simply go back into the value of the properties, making appreciation happen even faster."

Halstead notes that a statistically typical 8-room apartment on Park Avenue selling for $2 million would have appreciated about 28 percent in the 3.7 years it was owned by the current resident. Under current laws, a 55 year old seller would owe about $80,000 in capital gains taxes on the sale, taking into consideration an exclusion on the tax attributable to the first $155,000 in gain.

"In both Manhattan and the Hamptons we're starting to hear customers ask about the impact of these proposals," said Halstead. "By anybody's reckoning, $80,000 or $100,000 is a substantial amount of money, and these are the stakes for many sellers in these markets. The impact will be huge. When the tax revision is implemented, we expect it will cause even more upward pressure on prices that are already moving upward rapidly."

Halstead notes that the impact of the proposals will by no means be limited to New York's Silk Stocking areas: Beverly Hills, Bel Aire, Greenwich, Palm Beach, Aspen, and dozens of other communities with expensive property will be in the same boat.

"There are versions of the proposal floating around to cap the amount of capital gain which is free from tax at $500,000," said Halstead. "But this seems to be simply a gesture to stop the proposal from seeming like just another tax break for the rich, which, of course, it is. But I'm in favor of reducing the tax burden everyone has to bear on their home, rich or poor, because this is the principal repository of wealth for most American families. The current proposals are philosophically attractive and right, I think, because they afford the wealthy the same breaks the middle class already in fact get."