Report calls for broad federal real estate reforms
The nation should curb mortgage interest and real estate tax deductions to expand housing programs, revitalize cities and towns, and cut the deficit, say Smart Growth America (SGA) and Locus, a coalition of real estate developers and investors in Washington, DC.
The two groups released a report Federal Involvement in Real Estate: A Call for Action (pdf download) proposing broad reforms in policy.
“Americans increasingly want to live in walkable places — in center cities select suburbs, and small towns,” notes Locus president Chris Leinberger. “The few federal programs designed to encourage that type of development are not effective enough.” A hodge-podge of federal real estate programs were mostly enacted in the 1940s through the 1970s and lack a cohesive strategy to address today's real estate market and housing needs, says SGA President and CEO Geoff Anderson.
The changes to the mortgage interest and real estate tax deductions would save an average of $37.8 billion per year. If phased in, the changes would save an average of $19.7 billion per year for the next decade. “Any changes would need to be phased in, to not disrupt the market,” says Ilana Preuss, president and chief of staff of SGA. Phased in or not, curbing these programs would provide well over 90 percent of proposed savings in A Call for Action.
The report authors ask for “limiting the mortgage interest deduction to primary residences, and capping the deduction at $500,000 instead of $1 million in mortgage value. We also recommend limiting the real estate tax deduction for households earning over $100,000 per year. In addition, the capital gains exclusion should be lowered from $250,000 for individuals and $500,000 for households to $125,000 for individuals and $250,000 for households. The ability to claim the exclusion should be limited to once every 10 years to ensure that this tax benefit is not being used for activities like housing speculation.”
Graph from A Call for Action
The report further calls for reform of the federal flood insurance and the Federal Housing Administrations single-family housing program, both of which would save taxpayers money.
These savings would more than pay for $7 billion in new and expanded programs, the biggest part of which is $4 billion more in Low Income Housing Tax Credits (LIHTC). This program helps provide 100,000 affordable housing units a year, but doesn’t come close to meeting demand or need, according to Richard Baron, a low-income housing developer with McCormack Baron Salazar in St. Louis, who spoke in support of the report.
Further, the report asks for an expansion of the historic Rehabilitation Tax Program costing $1.6 billion. This includes extending rehabilitation tax credits to any buildings at least 50 years old (currently the cutoff is 1936) — but limited to buildings within a half mile of a town center or “an existing or planned transit facility.”
Finally, a program enabling individual mortgage savings accounts to promote homeownership and an “innovative financing structure for rehabilitated infrastructure” are also proposed. “Decades of deferred investment and maintenance make it too expensive for municipalities,” to rebuild infrastructure needed for revitalization — which puts the cost on private sector, says Dennis Allen, director of planning and development for ZRZ Realty, a Portland, Oregon, developer, who also supports the report's recommendations.
The time is ripe for these reforms, says Anderson. The US Senate and House of representatives are "seriously talking about tax reform," he says. "If there was any window, now would be the time.”
Frank Alexander, Sam Nunn Professor of Law at Emory University, says the comprehensive fix outlined in A Call for Action is unusual and long-needed. “Real estate finance has been my primary focus for the past thirty years, and in that time few—if any—organizations have called for a unified approach to real estate programs. Smart Growth America’s call to coordinate these complex programs fills a void in today’s policy debate.”
Better real estate strategies can make regions more economically competitive, says Anderson, “but we also have a fiscal responsibility.” These reforms will “more effectively serve real estate and finance goals in way that does address deficit reduction.” He called the recommendations “a starting point. This is a conversation that is long overdue.”
In January, SGA reported that the federal government spends $450 billion a year for real estate loans and grants, largely toward single-family housing. More recently a report called Building Better Budgets found that smart growth generates 10 times the tax revenue of conventional suburban development.
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