Disclaimer: This web site nor Mark MacKenzie are not rendering tax, legal, or financial advice. Consult with the appropriate professional before making any decisions related to these matters.
"What is The Tax Reform Act (TRA) of 1986?"
Congress passed the Tax Reform Act (TRA) of 1986 in an effort eliminate many tax shelters and simplify the tax code.
The Tax Reform Act imposed many changes to the tax code inlcuding income tax rates, home mortgage interest deductions, and depreciation scales. Most importantly, it set limitations for passive losses associated with investment real estate as well as put a cap on the adjusted gross income of those who could take advantage of the passive losses.
Specifically, for those "actively" involved in the management of their investment properties, the TRA of 1986 limited the annual passive losses to $25,000 a year. Additionally, only those with an adjusted gross income of less than $100,000 could take full advantage of the passive losses. For those making more than $100,000 their passive loss amount was phased out and pro-rated through $150,000.
Prior to this reform the passive loss and adjusted gross income amounts associated with investment real estate were unlimited.
What Congress "forgot" to do was provide a provision that would allow for these limits to be indexed for inflation.
Ironically, in today's tax code, for those individuals that the IRS considers to be "real estate professionals", the passive losses are unlimited, regardless of their income.
Additionally, it is worth noting that the depreciation scale for real estate investments was also lengthened from 15 years to 27.5 years for residential real property investments and 39 years for commercial real property investments. The result being that the tax benefit lost some of its luster.
"Who Cares About The Tax Reform Act (TRA) of 1986?"
The short answer to this is, "everybody that owns real estate."
This little piece of legislation goes far beyond impacting just those that invest in real estate. It impacts every person that owns a home as well.
The reason the TRA of 1986 negatively impacts homeowners is because it impacts the supply and demand for housing and subsequently property values.
Price stability is in the best interests of every home owner, real estate investor, lending institution, builder, and even Wall St.
"Why Now?"
It's been 22 years since the TRA of 1986 was passed. A lot has happened since then.
For starters, we have had 3.1% inflation over this period of time. Incomes have gone up, the cost of living has gone up, home prices have gone up. Yet the tax code as it pertains to investment real estate remains unchanged.
Need a second reason? Nationally, according to the National Association of REALTORS, the month's supply of housing in August of 2008 was 10.4 months. This is one the highest month's supply of housing since the NAR began tracking this indicator in 1989. The only month's that exceed this have all been in 2008.
Now ordinarily, this excess supply of housing may not be alarming, real estate is cyclical. What is concerning though is that mortgage rates are well below historic averages and near all time lows. Additionally, homeownership rates are still near the highest on record. According to the U.S. Census Bureau, in 2007, the homeownership rate was 68.4%. This is the 4th highest on record since 1965. The highest homeownership rate was 69.1% in 2005 when sub prime lending was experiencing a shopping spree of sorts. We all know how well that type of lending which supported that high percentage of homeownership worked out.
Contrary to Congress and some within the FOMC (Bernanke being the exception), lowering mortgage rates, increasing homeownership rates, or allowing property values to continue to receed from the high water mark, are not the solution to quickly and swiftly absorb the excess supply of housing and bring about price stability.
A new stimulus is needed to increase demand for real estate.
The Katrina of Real Estate
I am not going to minimize the loss of life that took place as a result of Hurricane Katrina and the Government's unacceptable response to that disaster.
I will say that once again the Government is confronted with an enormous disaster and once again the response has been lethargic in their timing and inadequate, woefully ineffective, and impotent in their response.
Their focus has been on trying to fix the levees that have been breached, preventing more foreclosures, but they are attempting to accomplish this with duct tape and ineffective homeowner bailouts with unresponsive lenders.
Additionally, nobody has addressed the issue that the city is flooded with housing inventory. And that until this water or the excess supply of housing can be pumped out, every homeowner will continue to be negatively affected.
The city is inhabitable.
And the Government is merely waiting for the water to evaporate.
The Flawed "Housing Affordability" Argument
A lot of well intentioned "experts" erroneously propose that by allowing home values to continue to recede and subsequently become more affordable that the real estate market will self correct and everything will be "ok".
I don't agree with this "logic".
First of all, according to the U.S. Census Bureau, homeownership rates are currently well above historic averages. For instance, as recently as 1994, the homeownership rate was only at 64%. Compared to 2007 when it was 68.4%. This despite the fact that homes were much more affordable in 1994 than in 2007.
For whatever reason, whether it be life style or credit worthiness, the historic homeownership rates in the United States have hovered in the mid 60th percentile. Only with the help of the sub prime mortgage market did the homeownership rate ever reach above 68%.
Second, let's assume these "experts" are right in their theory about housing affordability. Is it worth 68.4 homeowners losing significant equity in their home in order for .6 people to achieve the American Dream? Does this strategy help or hurt consumer spending and the economy? Something to think about.
Reforming The Tax Reform Act of 1986
My housing and economic stimulus plan has two parts.
1.) That we remove the passive loss and adjusted gross income limitations for non "real estate professionals." In other words, that the IRS recognize any American that chooses to invest in real estate as a real estate professional so that they can qualify for the same tax benefits that they were able to receive prior to 1986.
2.) That the IRS offer a one year 50% bonus depreciation just as they had signed into law with the Golf Opportunity Zone Act of 2005. This would provide Americans with an immediate incentive to invest in real estate throughout the country.
Not A Bailout
I am aware that those who oppose this reform will do so because of one of three reasons, if not all three.
The number one reason would be that this stimulus may appear like a bailout or tax break for those who speculated in real estate. I don't agree with this contention because the new tax benefits would apply only to investment proeprties that ewre put into use after this stimulus plan was passed by Congress.
The second reason this reform would meet opposition would be that it would be interpreted as a potential tax break for the wealthy. I do recognize this interpretation but we need to consider that this tax incentive is not for a specific tax bracket, only those that choose to invest in real estate will benefit directly from this stimulus.
The third reason there would be opposition to this reform is because it could be interpreted as a "license to speculate." Fortunately, current loan underwriting guidelines require significant documentaion and down payments for investment loans. This is the breaker switch that is now in place that was not in place a couple of years ago. The days of funny money are gone. This is a good thing as it allows banks and brokers to extend credit only to those who can repay the note. The days of pure real estate speculation are gone and because of the new loan underwriting standards we can feel confident that this reform would not provide a license or incentive to speculate in real estate.
"Why Should I Join The TRA 1986 Reform Movement?"
Joining the reform movement is not for everybody, only those that...
Want to stop the evaporation of equity from their home
Want to be able to sell their home
Want a real stimulus package for the economy
Want to decrease foreclosures in their neighborhood
Want to stem the credit crisis
Work in the real estate industry
And those that invest in real estate, should take action.
Three Things You Can Do Right Now
1.) Join the reform movement by signing up in the box below.
2.) Share this web site with somebody else today.
3.) If you have a web site or blog, place a link on your site to this web page.
Join The TRA 1986
Reform Movement
It's FREE!
(Our strict privacy policy keeps your email 100% safe and secure.)
|
| |
