It's simple to fix the budget in Washington D.C. According to Fareed Zakaria, author and foreign affairs analyst who hosts "Fareed Zakaria GPS" on CNN, eliminate the mortgage interest deduction.
Among recommendations that include removing tax deductions for employers that take health care deductions, scaling back Obama's health care overhaul, and increasing taxes, Mr. Zakaria recommends the destruction of the mortgage interest deduction, or the "sacred cow" that would take in a hundred billion dollars for the U.S. Government. He emphasizes that our country's appetite for debt is fueled by this subsidy and that Washington D.C. should eliminate it and profit from the savings they can use to pay for the 1.5 trillion dollar deficit and 1.3 trillion dollar deficit next year.
What Mr. Zakaria has forgotten is the effect of the mortgage interest deduction on home values. It's priced into market values today. How would home owners, lenders, and the real estate and related industries recover? And what would the secondary effect on IRS revenues from such a contraction?
What's more, watch out, commercial real estate investors. The mortgage interest deduction is one of the reasons commercial real estate investors buy commercial properties today: including depreciation, leverage, and appreciation. The deduction provides them with the ability to take advantage of tax savings on their leveraged cash flows as well as to account for an expense incurred to leverage real estate in an effort to drive value.
The removal of the mortgage interest deduction for commercial real estate would be catastrophic to property valuations across the country. Returns would be significantly affected in an environment where we're already struggling to absorb corrected valuations, some of which are less than the debt.
The mortgage interest deduction allows commercial real estate investors to subtract the cost of the interest paid on their property's debt from their cash flow before taxes. The reason the IRS allows investors to deduct mortgage interest is because it's paid as an expense the lender and the lender pays tax on the interest as income to its business. If the IRS were to eliminate the mortgage interest deduction, property owners would be less motivated to borrow money to purchase property and would no longer receive the benefit of this deduction as an expense.
Consequently, commercial real estate values would decline as investors revalued investment properties based on the tax regulations, which would mean they'd offer less for existing properties.
No comments:
Post a Comment