A Great Time to Be a Landlord?
March 8, 2013
The coming year could be a terrific time to be a landlord. Changes in the tax code could mean more business for us.
As there have been for some time, there are rumblings about doing away with the mortgage interest deduction for homeowners. Should that happen, homeownership would lose one of its biggest benefits, the ability to deduct the interest people pay from their income taxes. That is a deduction that is worth $215 billion dollars by 2021 according to the Wall Street Journal. The White House also wants to eliminate the deduction for real estate taxes running the total up to $400 billion in 10 years.
Congress wouldn’t phase it out all at once but rather in fits and starts. Most likely it would begin with a lowering of the limit of the mortgage amount eligible for the deduction from $1.1 million to $500,000. Then, inch by inch, Congress would take away more and more of it until homeowners could no longer deduct any mortgage interest from their income taxes.
Would it make much difference? According to a USA Today study with data from the IRS, only 26 percent of people take the deduction now with some states higher and some lower. But that means about a quarter of the people take advantage of it. USA Today apparently didn’t calculate the loan amounts of those people who took the deduction.
The question is, though, what would be the result for those people who were taking the deduction? As we all know, you can’t do just one thing. Every action results in someone reacting to the action to his or her benefit, or at least trying to react that way. One possible result would be that some people would become renters since owning a home would be less of a benefit. That especially might be the case in the states where more people take the deduction, such as those in the Pacific Northwest and New England with, the IRS reports, 30 percent or more taking it. Maryland has the highest rate with 37 percent taking it followed by Connecticut with 34 percent.
That does not include the people who decide not to buy a home because there is no tax advantage. It’s just as cost effective to rent, especially considering the tenuous housing market the last few years.
If people bail out of homeownership, they still have to live somewhere, and that somewhere would be renting from landlords. Will all of them do it? Obviously not, but think about what an influx of customers that would mean to people who own and manage rental properties.
You see, rental owners will still be able to take the deduction because it is a business expense taken on Schedule C, not Schedule A where consumers take the deduction now. We will also be able to deduct real estate taxes, a deduction the Obama administration wants to get rid of, for the same reason. It’s a business expense.
The elimination of the deduction could well impact the number of new homes built, too, because since fewer people would be buying homes, fewer would be needed. That would mean existing housing could become more valuable because there is less of it to go around. That means rents would go up.
Is a total elimination of the mortgage interest deduction going to happen anytime soon? Most likely not. Might Congress start chipping away at it? Maybe so. Count on the Realtors and National Association of Homebuilders to come out swinging. The Realtors spent $26 million on lobbying in 2012 while the homebuilders spent about $4 million in 2012 down from $10 million in 2009. That’s just lobbying, not campaign contributions. If the mortgage interest deduction is on the line, count on that spending going up. Will the lobbying and campaign contributions have an effect? Absolutely. Politicians don’t want millions of dollars thrown to their opponents in elections, something that would happen if they were to vote to eliminate the deduction.
Will Congress do something to the mortgage interest deduction soon? That seems likely since the have dug such a deep hole with the deficit that they have to at least make a show of trying to fill that hole. Will anything Congress does in that regard to benefit rental owners? You bet. It will mean more renters and more profitable rentals. It’s a great time to be a landlord.
About the Author: Bob Cain
Some 30 years ago Bob Cain went to a no-money-down seminar and got the notion that owning rental property would be just the best idea there is for making money. He bought some. Trouble was, what he learned at the seminar didn’t tell him how to make money on his rental property. He went looking for help in the form of a magazine or newsletter about the business. He couldn't find any.
Always ready to jump at a great idea, he decided he could put his speaking and writing skills to work and perform a valuable service for other investors who needed more information about property management. So Bob ferreted out the secrets, tricks and techniques of property management wherever he found them; then he passed them along to other landlords.
For over 25 years now, Bob has been publishing information, giving speeches, putting on seminars and workshops, and consulting for landlords on how to buy, rent and manage property more effectively.