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48 IRET Policy Bulletin 1 (1991)

handle is hein.taxfoundation/iretpbul0008 and id is 1 raw text is: February 12, 1991 No. 48 DESTROYING REAL ESTATE THROUGH THE TAX CODE Real estate is a major sector of the U.S. economy, and the level and growth of activity in real estate development, construction, finance, and sales exert significant influences on production and income throughout the economy. The sharp decline of the real estate industry occurring over the past five years is one of the prime sources of the Nation's current recessionary woes. Many of the problems in real estate markets since 1987 can be traced to tax code changes that were made in 1986. In constructing the Tax Reform Act of 1986 (TRA86) legislators could not have done a better job of destroying this market if they had consciously set out to do so. As a consequence, TRA86 had an important hand in creating the mess that currently faces the savings and loan industry and, as a result of the Bush bailout program, the tax-paying public. All of the important evidence shows that a serious downturn in housing and real estate markets began shortly after the enactment of TRA86. There has been a reduction in housing starts every year since enactment of the tax reform legislation. All housing starts were down by 36% in the 1986-1990 period with multifamily housing starts, primarily built for investment purposes, down by 71%. Three major changes in the tax law contributed to this result - the elimination of the capital gains tax differential, the passive loss limitation rules, and the lengthening of the tax write-off period for real property. Each of these tax changes represented a movement away from economically efficient tax policy. Combined, these changes in the law made real estate investment less attractive and reduced the market value of existing real estate. These tax changes not only reduced investment in new housing and construction, they also created an incentive to unload properties that were currently being held while increasing the difficulty of doing so. Probably the most widely debated change to take effect as part of TRA86 was the 40% increase in the capital gains tax. This tax increase itself reduced the market value of all real estate investments held at the time. Institute for IRET is a non-profit, tax exempt 501(c)3 economic policy research and educational Research organization devoted to informing the public about policies that will promote on the economic growth and efficient operation of the market economy. Economics of 1730 K Street, N.W., Suite 910 * Washington, D.C. 20006 Taxation (202) 463-1400 * Fax (202) 463-6199 e Internet www.iret.org

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