The immediate expense of real estate would do more negative consequences

The immediate expense of real estate would do more negative consequences
Published on May 5, 2020,08:15 am by Julio Gonzalez for

The recent proposals to allow companies to immediately expense 100% of real estate, while well intentioned, would have far more negative consequences than the benefits some promise. Larry Kudlow, director of the National Economic Council, is recommending that companies be allowed 100% immediate expensing for all costs, including buildings, in an effort to encourage companies to move from overseas to the U.S. and jump-start the economy. This would be economically consequential for several reasons:

1. Cost: The near $1 trillion estimated cost burden (based on the Tax Foundation’s 2017 estimates) would fall on those least-equipped to manage it and struggling the most: small businesses and individuals.

2. Such a policy has already proven to be ineffective: This proposed tax break for real estate investors would incite the same negative consequences the U.S. experienced in the 1980s when depreciation of buildings was reduced in an attempt to stimulate the economy. The fallout of that was the use of real estate developments to create tax shelters without economic demand, resulting in massive overbuilding, ultimately contributing to the savings and loan/real estate crisis.

While tax laws — including passive activity loss, at-risk limitations and net operating loss carry-forward rules — were established in an attempt to stop real estate tax shelters, the rules are simple to avoid, and the IRS is unable to effectively audit the number of claims each year. Some economists will continue to cite that immediate expensing of structures like office buildings, manufacturing plants and commercial real estate would contribute most substantially to the growth of gross domestic product and encourage companies to return to the U.S. This is a fundamentally flawed and economically irresponsible assumption.

3. Tax loophole abuse: Some real estate investors likely will leverage real estate purchases at 80% of acquisition costs to get 100% immediate expensing purely as a tax ploy. The proposal will drive investors to profusely leverage real estate to get massive tax breaks. For example, an investor could buy a $10,000,000 building with $8,000,000 in debt and $2,000,000 in equity and receive a $10,000,000 tax write-off. This is a dangerous, gaping tax loophole that will do little to enable the U.S. to recover from the economic fallout of COVID-19.

In summary, this move would be too bold and extreme, at the costs of all citizens and small businesses. Similar policies have historically been ineffective at best and often damaging.

Better Alternatives Exist

There are far more effective and responsible ways to entice companies to return to the U.S. and shore up the economy as we look past COVID-19. New legislation needs to focus on providing a low-tax environment to enable businesses to sustain operations, not immediate expensing of real estate.

President Trump’s proposal for a payroll tax holiday for small businesses and individuals, and the potential expensing of travel and entertainment, would provide a far more impactful stimulus to the nation’s small businesses and households. The messaging would be more effective and reassuring with far less potential for negative fallout.