By Robert Freedman, senior editor, REALTOR® Magazine
The contentious debt ceiling deal enacted into law earlier this week as the Budget Control Act of 2011 doesn’t say anything about what programs should be cut and how tax benefits might change, but because it puts lawmakers under the gun to find up to $2.4 trillion in deficit reduction, it’s likely the mortgage interest deduction and other federal commitments to housing will come under discussion.
The biggest risk to real estate comes in the second of the deal’s two-part deficit cutting mechanism. The first part requires about $920 billion in cuts in exchange for about the same amount in increased debt ceiling cap. That part happens quickly—as envisioned, before the end of the federal fiscal year, which is at the end of September. Because of that short time frame, it’s unlikely highly controversial matters like MID or the tax treatment of carried interest will get taken up.
But the second part of the deal, which requires up to $1.4 trillion in cuts in exchange for about $1.2 trillion in debt ceiling increase, will be a little riskier for real estate.
To be sure, there’s no requirement that any amount of deficit reduction come from tax changes. It’s thus entirely possible that all of the deficit reduction will come from cuts to discretionary spending programs and the military. Even Medicare might get cut. (Medicaid and Social Security are exempt.)
But it’s prudent to stay on top of the discussions as they happen, because MID will certainly make a tempting target. Estimates vary widely on how much MID costs the federal government in revenue each year. Upper estimates are around $80 billion, lower estimates are around $25 billion. The reason some estimates are so low is because of how people are expected to change their behavior if MID is modified. Some analysts say home owners will move lost MID tax savings into other types of tax savings, offsetting some or all of the gains the U.S. Treasury would have seen from changing the MID benefit.
On carried interest, which is of particular interest on the investment real estate side, certain income to the general partner in a real estate partnership is taxed at the capital gains rate. There are proposals floating around that would treat that income as ordinary income, increasing the tax burden. The carried-interest issue is mainly an issue for general partners in hedge funds, not real estate partnerships, so critics have made the case that proposed changes shouldn’t apply to real estate partnerships.
In any case, these are the kind of proposals that have a good chance of surfacing as lawmakers look for ways to reduce the deficit, so it’ll be important to stay on top of the news as Congress starts to act.
In the video above, NAR Director of Tax Policy Linda Goold talks about the potential impact of the debt ceiling law on real estate.