New Administration’s Tax Bill May Hasten Real Estate Recession
The 1986 Tax Reform Law made radical changes to real estate investment which led to the S&L Crisis where 747 Institutions with assets valued at over $394B failed. That’s nearly $1T in today’s dollars.
In turn, this led to the overall economy recessing in 1990 – 91. Of course, we taxpayers ended up footing the bill.
The 1986 Law reduced the top personal income tax rate from 50% to 28%. In order to pay for this, Congress increased Cap Gains rates from 20% to 28%. They also limited the deductions investors could take on the passive losses that were generated by real estate.
When these rules went into place, investors did what investors do best. They moved money out of real estate into more lucrative investments.
Investment capital dried up and real estate values plummeted given the lack of demand as a result.
S&L’s became insolvent as their loans went bad. The overall resulting real estate recession pushed our economy into the 1990 – 91 mess that simply can’t be forgotten.
Fast forward twenty years, and what does the new administration want to do to real estate taxation? Basically the same thing.
Cap Gain rates for many would increase from 20% to 39.6%. Additional limitations are proposed to reduce deductions on interest and depreciation. There’s also the nightmare of the tax on real estate appreciation when an owner dies, whether the property is sold or not.
Real estate isn’t an easy investment. It’s long-term, labor intensive, and extremely risky. It’s also the largest investment, that many will make in their lifetime.
By definition, this isn’t a tax on the rich or the ultra-rich. This will effect just about everyone. Without tax incentives, real estate cannot compete with other investments for capital. It’s just too easy to dump money into an ETF.
When you add in the problems that most landlords are having collecting rents from retail spaces and the overall Amazon affect, the whole thing turns into a nightmare of gargantuan proportions. We can only hope that Congress comes to its senses and remembers it’s mistakes from the past.
No one needs another recession.
Let me leave you with this.
Not long ago, Chicago was again voted the second most beautiful city in the world. Top honors went to Prague.
Having enjoyed Prague’s old town, the St. Charles bridge, and the City of One Hundred Spires, I can tell you that I agree. Once there with a hearty Czech beer stein in hand, I didn’t want to leave.
Chicago was also simultaneously voted the “Rat Capital” of America for the 7th straight year.
One recent Saturday night my family had tickets to the Auditorium Theater. We enjoyed deep dish at the Exchequer Pub and walked past my alma mater (DePaul) down Wabash, to go to the theater.
On our way, we counted four rats that crossed our path. I had to ask my wife if the Pied Piper was anywhere in sight.
I tell you this because Chicago is a place of extremes.
In the same frame you’ll see one of our magnificent museums with people out front begging for change. You’ll drive our magnificent lakefront, to have it broken up by the innumerable tent cities of the homeless.
Living here requires a filter. One must be able to focus on the good rather than the bad. Without that filter, you’ll go nuts.
If the last couple of years have taught us anything, it’s that this skill is what get’s us through the more difficult times. Do yourself a favor.
Always try to see the good.
We’re all going to get through this. Let’s get through it together.
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