Effect of Home Mortgage Interest Tax Deduction on Multifamily Real Estate
- Nov 28, 2011
By: Jeffrey A. Kohn, Esq.
There have been a number of proposals to reduce or eliminate 26 U.S.C. § 163(h) of the Internal Revenue Code, which currently allows home mortgage interest to be deducted for federal tax purposes (the “Mortgage Interest Deduction”) subject to certain limitations. Currently, most taxpayers that elect to itemize may deduct the interest on their mortgages on their federal income tax returns. There are two important limitations on the Mortgage Interest Deduction: (1) the deduction is limited to interest on debts secured by a principal residence or a second home and (2) interest is deductible on only the first $1 million of debt used for acquiring, constructing, or substantially improving the residence (as well as an extra $100,000 in certain cases).
If the Mortgage Interest Deduction is eliminated, the most immediate and direct effect will likely be that, compared to the current environment and assuming everything remains equal, renting will become more attractive compared to buying for typical homeowners who would have financed their house/condominium purchase with mortgage debt. This is because there will no longer be a tax benefit to owning a house/condominium and carrying a mortgage and therefore after-tax cost of owning a house/condominium would increase significantly for many would-be homeowners. This change should be particularly beneficial for multifamily owners that have units that are decent substitutes for homes and condominiums and that attract renters that would otherwise be in a position to own a house/condominium but are also considering renting an apartment unit. And, because it takes real assets to be able to purchase a home in the current environment, the likely immediate affect will be to drive up demand for higher end multi-family units that are good substitutes for houses/condominiums. Because of this increased demand, rental rates would be expected to increase for higher end multi-family units will (and prices and demand for houses/condominiums will presumably decrease). However, even though high end unit rental rates would be expected to increase the most, other types of multi-family units would also be expected to see increased demand and presumably increased rental rates, although perhaps the affect will be less dramatic.
Jeffrey A. Kohn, Esq. specializes in real estate and business law. Mr. Kohn currently practices with Halling + Sokol LLP and previously practiced with Manatt, Phelps & Phillips LLP. He can be reached at (310) 277-2080 or firstname.lastname@example.org. Mr. Kohn welcomes questions and feedback.
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