THE FINAL TAX BILL : Home Ownership : An Incentive to Buy Is Anticipated, Because Analysts Expect Rents to Soar

The stringent new rules on business deductions have put real estate near the top of the list of losers under the tax bill that cleared a House-Senate conference committee last weekend. But many experts believe that most owner-occupied homes will lose none of their value.

“Owning a home will still be a favored form of investment,” said Steve Corrick, a tax analyst with Arthur Andersen & Co., the accounting firm. “More so, in fact, than under current law. You will still get to deduct mortgage interest and property taxes and delay capital gains. The tax benefits of home ownership are not cut back as are the benefits available to other kinds of investment.”

Rents May Rise 30%

Rental housing may not fare so well, however. Other tax and real estate specialists said the toll that tax revision will exact on commercial real estate tax shelters will drive rents up as much as 30% over the next three to five years. The all-but-inevitable result will be that the incentives to buy, rather than rent, will increase under the new law.

Representatives of the National Assn. of Realtors see home values nationally increasing by 4% to 5% over the next few years.

That is slightly less than the projected inflation rate and also slightly less than the realtor group’s forecast of a 7% to 8% increase under the old tax rules. High-priced homes are largely responsible for the projected decline in the rate of growth of home values.

The reason has to do with the reduction of the maximum tax rate from 50% to an effective 33%. For many affluent homeowners in the 50% tax bracket, the value of their mortgage deductions was 50 cents on the dollar. With the new top rate of 33%, that deduction will fall to 33 cents.

Rich May Spend Less

“We believe that higher-priced homes will suffer the most,” said Janemarie Mulvey, director of forecasting with the National Assn. of Realtors. “Perhaps people in this bracket will decide to buy less house in the future.”

The tax bill will not interfere with one of the present tax code’s other ways of providing homeowners with favored treatment: the one-time exclusion of up to $125,000 for capital gains earned from the sale of a home by people 55 and older.

If the tax bill will not reduce the value of buying a home, economists said the cost of not buying will become higher still.

James R. Follain, director of real estate research at the University of Illinois, predicted that the new tax plan’s restrictions on deducting expenses associated with owning rental housing will drive rents up as much as 30% over the next five years. Similarly, the National Assn. of Home Builders predicts an increase of 15% to 20%.

Can’t Shelter Other Income

The new law will allow owners of rental property to deduct their costs only from the income they make on the property and not from other income as well. They will no longer be able to use the costs to shelter other income.

“It takes away the tax deductions and taxes capital appreciation at a higher rate,” said Jay Shackford of the NAHB. “That puts pressure on rents to go up, so capital going into rental housing will go elsewhere.” Further pushing rents upward will be a consequent decrease in the construction of rental housing, as investors pull out of the commercial real estate market and put their money in other investments.

Shackford said that his association expects rental housing construction to drop 250,000 to 300,000 units per year for the next few years.

In the end, said Gillian Spooner of the Touche Ross & Co. accounting firm, “I personally think that in ordinary suburban neighborhoods where most people own their houses, home values will be retained and will continue to rise with inflation.”

“I don’t really think that the fact that the mortgage and tax deductions are worth less will affect most decisions to buy,” Spooner added. “If I were a renter, I’d be concerned about rents going up, so there could be even more of an incentive to buy under the new tax law, even though the value of the deductions is less.”