Learning from Past Mistakes: Avoiding the Next Real Estate Bubble
The time may be right for comprehensive tax reform. However, certain proposals floating around Capitol Hill could do far more harm than good, drowning real estate investment and taking down markets across the country along with it. Congress should not attempt to fix what is not broken.
Particularly troubling are proposals to change the taxation of real estate investments by allowing investors to immediately expense the full value of improvements or buildings (land is not included). While at first blush immediate expensing appears to be a huge and unprecedented tax break—real estate investors would pay virtually no taxes in the first few years of the investment—the honeymoon period would end with a crash when the write-off period ended.
Nationwide, commercial real estate values have eclipsed their previous peak in 2007 by 23 percent. Real estate doesn’t need the stimulus that immediate expensing would create. Immediate expensing is akin to turning real estate into a speculative stock. Currentdepreciation levels are appropriate for this long-life asset class.
Under immediate expensing, the excess tax shelter resulting from the preliminary write-off could be used against other income and investments. This could cause a massive flow of capital into real estate, driving up real estate prices without changing the fundamentals. Bu the tax man would soon come calling, since immediate expensing’s rewards demand eliminating the depreciation deduction. The result? Taxable income that would exceed cash flow.
To continue reading click here!