Time has come to unchain Real Estate Investment to compete with Wall Street
Equities. - By Stanley Yavneh Klos – July 4, 2016
It is a fact that since the earliest days of our republics, real estate investment has led the way in the expansion of citizen and national wealth. The 1787 Northwest Ordinance's Ohio land sales funded the last vestige of the Articles of Confederation government enabling it to launch a new federal republic after the March 4th, 1789, enactment of the current U.S. Constitution. Since then, real estate investing has provided the average person with the most realistic opportunity of building wealth, catalyzing individual entrepreneurship and realizing economic independence.
In 1987, however, this all changed with the enactment of the 1986 Tax Act. In short, this tax act has encouraged millions of US citizens to mortgagee their homes at maximum levels to take advantage of the "Earned Income" mortgage interest tax deduction. Moreover, the 1986 Tax Act has stimulates average citizens to invest in Wall Street Equities, rather than local real estate because real estate is relegated to a "Passive Income" tax code category while the potpourri of commodity, bond and stock equities are placed in the Wall Street friendly "Portfolio Income" tax category.
Since 1987, millions of working class citizens like plumbers, teachers and police officers chose not to diversify their investments into local real estate markets because these "Passive Income" losses/gains cannot be offset by the myriad of "Portfolio Income" equities losses/gains. Since then, middle class investment money has flowed out of "Main Street" real estate investments, controlled by citizens locally, into stocks, bonds and commodities that are controlled by the large international financial corporations yielding unprecedented company profits. The result has been a windfall for billionaire equity company executives and shareholders at the expense ordinary citizens who up until 1986 primarily built wealth and financial independence in their hometown real estate markets.
Additionally, the "Earned Income" mortgage interest tax deduction has fostered a citizen investment strategy of mortgaging homes to maximum levels funding everything from cars to student loans. Why? Mortgage interest is tax deductible and this coupled with low 30-year and/or “interest only” home equity loans payments are more preferable than non-tax deductible high monthly payment consumer and credit card loans. Now, 30 years later, the 200-year-old U.S. tradition of paying off your mortgage is dead while corporate equity and mortgage loan firms flourish thanks to the 1986 Tax Act.
In short, a major reason for the dramatic increase in United States income inequality is primarily due to these two aberrations in the 1986 Tax Act Code.
It is my position that a sound tax policy moving real estate investment into to the "Portfolio Income" tax category while limiting home mortgage interest tax deductions to loans no larger than 50% of the home’s original purchase price will build widespread citizen wealth and spur on economic development.
Simply put, these tax code changes will ignite "Portfolio Income" diversification into local real estate investment and development. It will also hold the line on citizens mortgaging their homes to 50% of their original value. This real estate tax code change of the 1986 Tax Act, will promote thrift and reverse the ever widening income gap between the wealthy and the working class.
As you can see by the attached Article, I warned the George H.W. Bush administration of this economic cancer back in1992, predicting the real estate mortgage crash by 2006, which finally came to pass in 2008. Despite RE/MAX and other real estate credentials this proposal has been dismissed by Congress, which is the only entity along with the President that is empowered to effect change on the U.S. federal tax code.
To date, none of the Presidential candidates see this real estate forest for the equities tree. Sadly, the gap between the rich and poor continues to widen as Presidential candidates on one side offer more failed socialist programs while candidates on the other side offer ideas of isolationism.