Real Estate Coalition Pushing to Regain Tax Breaks on Rental Property Ventures : Economy: Backers say measure would aid recovery. Perceived abuses prompted reformers to repeal write-off in 1986.


A coalition of real estate groups and their congressional supporters, hoping to capitalize on the growing clamor for economic recovery measures, is pushing for partial restoration of a controversial tax break repealed by reformers five years ago.

Despite the proposal’s apparent popularity on Capitol Hill, however, some critics warn that enactment of the “passive loss” incentive as part of an anti-recession tax package could promote the same kind of overbuilding that contributed to the collapse of real estate markets and lending institutions in recent years.

The passive-loss proposal would give back to investors involved primarily in real estate the ability to reduce their taxes by deducting from their taxable income the losses they incur in any rental real estate venture, whether commercial or residential.

That right was taken away in 1986, largely because of a perception in Congress that the tax laws were being widely abused by wealthy investors, including many doctors and lawyers who often used paper losses in real estate projects to offset their sizable professional incomes. The new plan would limit the tax break to those who spend at least half their time working in real estate.

“I think that most people agree that in 1986 Congress went a little too far,” said Jonathan Kempner of the National Multi-Housing Council. “There was the notion of the greedy real estate people, there was the notion that things had been too sweet and too lucrative for them.” Supporters, including the National Assn. of Home Builders and National Assn. of Realtors, say the plan would ease stress on lenders and bolster the real estate market by encouraging developers not to turn over to banks failing commercial and residential properties.


In addition, backers say the measure would promote new investment in potentially risky or marginally profitable ventures, such as low-income rental housing.

“Originally, Congress passed this (repeal) with the intent of cracking down on tax shelters, but it went too far,” said Steven Weber, treasurer of Orange County-based Arnel Development Co., one of Southern California’s largest developers of apartment buildings.

“Certainly if these restrictions were lifted there would be a lot better opportunity to develop properties,” Weber said.

Some observers, however, question whether the proposal actually would spur much new investment.

“I think it’s a good idea from the point of view of justice and reasonable policy,” said Anthony Downs, a senior fellow at the Brookings Institution who studies housing and real estate issues. “But I think it would have a less dramatic effect on (real estate) markets than its proponents claim.”

At the same time, critics assert that the passive-loss plan would only encourage the same kind of overbuilding that got the real estate industry into trouble in the first place.

“It’s hard to figure that what we need is more empty office space,” said Robert S. McIntyre of Washington-based Citizens for Tax Justice, a lobbying group that describes its mission as promoting tax fairness for the middle class.

“This is entirely an issue of campaign finance,” McIntyre said. “Real estate developers make a lot of contributions.”

The passive-loss provision is one of several proposed tax cuts contained in an economic growth package put together last month by House Republicans and tentatively endorsed by President Bush. Supporters hope it will be part of the official White House economic stimulus plan to be unveiled by Bush next month in his State of the Union speech.

At a Capitol Hill hearing last week, Treasury Secretary Nicholas F. Brady said he does not believe a wholesale revision of the passive-loss provisions would be appropriate. But Brady left open the possibility that the Administration might consider a limited revision.

So far, more than 325 House members--conservative Republicans as well as liberal Democrats--haved signed on as co-sponsors of a measure that would reinstate the passive-loss tax break. The legislation, authored by Reps. Michael A. Andrews (D-Tex.) and Tom Campbell (R-Palo Alto), has the support of a majority of members of the House Ways and Means Committee, which must initiate any changes in the tax laws. The committee’s powerful chairman, Rep. Dan Rostenkowski (D-Ill.), has not yet taken a position.

Supporters of the plan are sensitive to charges that changing the passive-loss rules would revive one of the much-reviled icons of the 1980s--the tax shelter for rich professionals.

“Tax shelter investors in real estate . . . would receive no benefit from the bill,” said Sen. David L. Boren (D-Okla.), who has introduced passive-loss legislation in the Senate.

Real estate professionals say that Congress went too far when it revised the tax code in 1986. Lawmakers, they say, should have repealed the real estate tax benefits only for those who do not directly earn their living in real estate construction, sales and related fields.

While other business people are allowed to deduct losses incurred by one business against the income generated by others, real estate people are unfairly denied that privilege, the industry groups argue.

“We refer to it as a fairness provision,” said Kent W. Colton, executive vice president of the 153,000-member National Assn. of Home Builders. “If somebody is an entrepreneur in the real estate and housing development business, they should be treated no differently than people in any other business.”