Q: With the U.S. real estate market still at death’s door – and the prospect of a “triple dip” for commercial and residential prices a very real one – no serious recipe for economic recovery can ignore the seriously upside-down housing situation.
The only cure for falling prices – supply far outstripping demand – is to increase demand.
My solution? Make it attractive for investors to buy real estate and soak up the supply. Restore the tax incentives that existed before the last “tax reform” killed the real estate market and precipitated both the savings and loan crisis and the last real estate crash. You used to be able to write off real estate in 15 years – now the periods are 27.5 years for residential and 39 for commercial.
That’s if you qualify to take the deductions, and nearly no one does. Bring back the tax incentives, and watch the wealth creators bid prices up. Throw in reasonable financing, and we could start to move real estate markets in months.
In the early 1990’s, after tax reform destroyed real estate, my wife and I bought dozens and dozens of houses (most of which I still own) at give-away prices with as little as $500 down, financing guaranteed by Uncle Sam, who was needing to dump foreclosed properties that he had encouraged folks to buy for $1 (one dollar!) down.
After awhile, I had lots of competition, and by the late 90’s (well before the last real estate bubble began) competition had brought prices up to levels where a landlord could not make a killing, and I stopped buying. Prices are cheaper now than then, and we need stronger medicine.
Combine tax incentives with financing to people responsible enough to pay it back, and watch the needle move!
A: Thanks for your comment and insight. We noticed from your email signature that you are a Certified Financial Planner (CFP) and own a financial advisory.
While tax incentives work, it would be interesting to find out if there is any appetite in Washington to address the issues you suggest. Most of the talk these days involves residential real estate and homeowners stuck with underwater mortgages. Your solution comes from a different perspective, and you postulate that by assisting real estate investors you might indirectly wind up helping residential homeowners.
With many Republican candidates talking about flat tax rates and a simpler tax code, any change in the tax code that gives incentives to one set of people over others might be contentious these days.
And when you talk about reasonable financing for investment properties, interest rates are about as low as they can be. But commercial lenders have guidelines that may create an impediment to some real estate investors by requiring large cash down payments towards the purchase of investment real estate properties.
The “reasonable financing” you are talking about is really a throwback to the days in which lenders had loose underwriting standards.
It wasn’t long ago that we saw commercial real estate deals financed with no money or very little money down. Now that lenders have seen what can happen, you might get a great interest rate and you might get great loan terms, but you will probably have to have quite a bit more cash invested to get those deals done.
In the “good old days,” you could buy one property and leverage that property to buy others and as property values went up, you could further leverage your current properties to buy even more properties. In the end, you could own many properties and have little of your money invested in any of those properties. For now it seems those days are over.
We may not see those days for some time to come, but there are many real estate investors that are finding the means and the money to buy residential property these days and continue their investments in real estate.
And while you might say that there are few tax incentives in real estate, real estate investors know that there are still great tax incentives. Real estate is one of the few businesses in which you can accumulate wealth, buy and sell properties repeatedly and never pay any federal income taxes if you follow certain rules.
Real estate investors know that they can sell an appreciated property, set up a 1031 exchange at the time of the sale, buy a replacement property with the proceeds from the sale and defer the payment of federal income taxes indefinitely. For some real estate investors, they could even accumulate wealth in real estate, not pay any taxes on that accumulated wealth and upon death, their properties could be valued at that time, pass on to their heirs at the appreciated value and no federal income taxes would be paid. Not a bad deal.
In addition, if you are a real estate investor and your business is just that, there are huge tax advantages even with the less advantageous depreciation rules you describe. Using those depreciation rules, you can make money from renting properties and create a scenario where you might make a great amount of income yearly but pay no federal income taxes on that income.
Again, the political environment may not be there to give real estate investors a break at a time when homeowners are foreclosed from their homes. You are right that the amount of real estate inventory is a problem and will take time to solve it.
Your idea of creating a tax incentive might pass only if it was part of a broader package that was created to assist homeowners as well.