Passive Losses and Tax Shelters
By enacting 26 U.S.C. ยง 469 (relating to limitations on deductions for passive activity losses and limitations on passive activity credits) to remove many tax shelters, especially for real estate investments, the Act significantly decreased the value of many such investments which had been held more for their tax-advantaged status than for their inherent profitability. This may have contributed to the end of the real estate boom of the early-to-mid 1980s as well as to the savings and loan crisis.
Prior to 1986, much real estate investment was done by passive investors. It was common for syndicates of investors to pool their resources in order to invest in property, commercial or residential. They would then hire management companies to run the operation. TRA 86 reduced the value of these investments by limiting the extent to which losses associated with them could be deducted from the investor's gross income. This, in turn, encouraged the holders of loss-generating properties to try and unload them, which contributed further to the problem of sinking real estate values. This turmoil and repositioning in real estate markets was caused not by changes in market conditions.
Mortgages and similar real property loans constituted a significant portion of S&Ls' asset portfolios. Significant declines in the market value of real properties resulted in the erosion of the value of these institutions' major assets.
Some economists consider the net long-term effect of eliminating tax shelters and other distortions to be positive for the economy, by redirecting money to the most inherently profitable investments.
To help less-affluent landlords, TRA86 gave a $25,000 net rental loss deduction provided that the home was not personally used for the greater of 14 days or 10% of rental days, and AGI is less than $100,000 (pro-rated phase-out through $150,000).
Read more about this topic: Tax Reform Act Of 1986
Famous quotes containing the words passive, losses, tax and/or shelters:
“To make oneself an object, to make oneself passive, is a very different thing from being a passive object.”
—Simone De Beauvoir (1908–1986)
“Hold back thy hours, dark Night, till we have done;
The Day will come too soon.
Young maids will curse thee, if thou steal’st away
And leav’st their losses open to the day.
Stay, stay, and hide
The blushes of the bride.”
—Francis Beaumont (1584-1616)
“The government’s view of the economy could be summed up in a few short phrases: If it moves, tax it. If it keeps moving, regulate it. And if it stops moving, subsidize it.”
—Ronald Reagan (b. 1911)
“Parents have railed against shelters near schools, but no one has made any connection between the crazed consumerism of our kids and their elders’ cold unconcern toward others. Maybe the homeless are not the only ones who need to spend time in these places to thaw out.”
—Anna Quindlen (b. 1952)