Real Estate OK in Debt Deal But Risks Remain

August 3, 2011

The debt ceiling agreement signed into law on August 2 has no direct impact on real estate tax rules or spending provisions, but the industry isn’t out of the woods yet, because the deal includes authority that could make it easier for Congress to make tax law changes in the months ahead.

The new law increases the debt ceiling in two steps. The first is automatic through the end of the year. The second increase is contingent on a number of factors, including recommendations for cuts and tax increases from House and Senate committees and a new super committee that will package together the recommendations or make its own as needed.

The super committee is given the authority to identify up to $1.5 trillion in deficit reductions over 10 years. This deficit reduction is on top of almost $1 trillion in cuts to be made over the next few months, for a total of about $2.4 trillion in cuts over the 10-year period. The almost $1 trillion in cuts over the next few months include no tax increases, but the $1.5 trillion second phase can include a mix of cuts and revenue increases. If the $1.5 trillion target in the second phase of cuts isn’t met, a mechanism for automatically making cuts kicks in. A significant portion of those cuts must be to military spending.

The next 100 days could be the most important part of the battle for real estate, because it’s in this period that the mortgage interest deduction and tax rules for carried interest are expected to be most at risk. Under the carried interest provision, the income of general partners in real estate partnerships is taxed at the capital gains rate. Under changes that have been proposed in the past, that income would be taxed as ordinary income, a higher rate. NAR supports keeping carried interest for general partners in real estate partnerships taxed as capital gains, the same as for investment partners.

Source: REALTOR® Magazine Daily News

Read more:
Debt Ceiling Passes by Strong Margins