Wednesday, November 02, 2005

Big tax law news: Mortgage Interest Deductions!

Holy COW!!! One of the sacred cows of the American system of taxation being discussed as a candidate for slaughter to the cash hungry United States Government...

That sacred cow is the MORTGAGE INTEREST DEDUCTION!!! Almost as sacred as social security, this deduction allows most taxpayors who itemize to deduct the interest paid on first and second homes from their taxes on Schedule "A" of their tax return. There are limits to deductability, but for most Americans the limits do not impact them.

How did this happen?


President Bush appointed a bi-partisan committee to study the tax code and come up with ways to make it "fairer", promote growth, and update the tax system. The committee came up with a proposal to replace the current laws that allow most taxpayors to deduct mortgage interest (as mentioned above- assuming the itemize their deductions) to instead have a tax credit of up to 15% of interest paid on their principal residence. There was a flap and the committee came back with a revised recommendation of allowing deduction of 25% of the interest paid.

The proposal would no longer allow for deduction of home equity loan interest or for second or vacation homes.

The last time there was a major overhaul of the tax code as it affect real estate was in 1987. That overhaul caused the savings and loan crisis, subsequent failure of many savings and loans, and a huge crash in real estate values. The 1987 overhaul had to do with the ability to depreciate properties, not with mortgage interest deductions, but in my opinion this proposal, if it goes through, will have a huge impact on the housing market.

I see high-end houses in high cost areas (ie; South Florida, California, New York, Boston, Washington) going down dramatically in value because the goverment will no longer be effectively subsidizing those huge mortgage payments. I also see the second home market crashing...all those beautiful beach houses and mountain retreats no longer being seen as investments you can use but instead as very expensive ways to vacation.

Additional links:

http://money.cnn.com/2005/10/11/pf/taxes/mortgage_interest/

http://www.csmonitor.com/2005/1018/p09s02-coop.htmlhttp://realtytimes.com/rtapages/20051019_debate.htm

http://www.latimes.com/business/la-fi-taxbreak8oct08,0,1112971.story?coll=la-home-headlines

It is important to understand that good investing practices do not rely on tax treatment. Smart investors invest when the deal stands on its own, not when there is some tax benefit that makes it all work. Smart investors also study the psychology of John Q. Public and act accordingly. John Q. is being told almost daily to look out for a crash in the housing market and if these proposals go through I think John Q. will be told the end has come by the popular press and will quickly turn from real estate to other ways to invest his hard-earned money.

My advice is to keep a careful eye on the tax news as the proposal makes its way around Washington. I would also stay away from investments in high end homes, pre-construction condominiums, or any other pre-construction deal. Those deals depend upon future increases in value and those increases are not going to come.

We are at the end of the expansion in real estate. You should be investing based on using your real estate purchases as profitable rentals (meaning you have cash flow) or by fixing them up and flipping them to a retail buyer. Your profit cannot depend on future appreciation in a market that may go soft or may decline in value. In this kind of market I also like investments in houses priced for first time home-buyers and houses where you can afford to rent them for awhile if you cannot flip them for a profit. There are always first time buyers coming into the market and there are always renters looking for a place to live.

Good investing!
Bob Diamond

http://bobdiamond.com




About Me

Philadelphia, PA, United States
Bob Diamond is a practicing real estate attorney, real estate developer, and published author of three books on foreclosure investing. You may be familiar with Bob from his appearances on FOX, NBC, or CNBC or on his real estate radio show. Inside the investor world, Bob is known as the ‘guru’s guru’ and teaches advanced real estate investing techniques including buying discounted liens, notes and judgments, buying out of bankruptcy, short sales, taking under and subject to, straight equity purchases, multi-units and even condo conversions.