Tax Reform, Tax Incentives and Investment Returns on Rental Housing

摘要

The effects of the 1976 Tax Reform Act (TRA) on investment returns in rental housing are analyzed, and the effects of additional tax reforms on future rental housing investment returns are considered. Using a base investment case, consisting of data available on cost, rents, expenses, financing, and other pertinent information for a 120 - unit garden apartment complex in the midwest, results show that TRA provisions affecting amortization of construction period interest and taxes, amortization of loan fees, and elimination of the excess depreciation recapture credit will contribute to a long - run 4 - to 5 - percent rent increase. Further, the pattern of amortization of these charges, coupled with higher taxes in the year of sale due to elimination of the recapture of depreciation credit, motivate owners to hold investment properties longer. Rent increases necessary to provide suppliers of new construction with a competitive return will be capitalized into higher values for older rental properties. Provisions in TRA do, however, reduce deadweight losses enjoyed by investors in tax brackets that are higher than the tax bracket considered applicable to the marginal real estate investor. Other potential tax reforms included in the study were limitation of artificial accounting losses, full recapture of depreciation, restriction of depreciation methods to either straight line over 40 and 75 years or reverse sum of the years digits over 40 and 75 years. Each of these provisions was considered in the base case; then, all were coupled with full recapture depreciation to assess the impact on rents. Results indicate that rents can be expected to increase in amounts ranging from 9 percent to 30 percent, depending on the severity of the tax change chosen and assumptions about changes in tax rates relevant for the new marginal investor in each case. Tabular data and a bibliography are provided.