Each of these changes symbolized a movement from economically efficient tax policy. Combined, these changes made the investment in new housing and construction less attractive and reduced the market value of existing real estate by creating an incentive to unload properties while increasing the difficulty of doing so. 72 if these were in the 28% bracket. This depressed the value of real estate, in turn leading to property beliefs to decline. Many profitable real estate investments became marginal or submarginal.
Increase in Depreciable Lives Adversely influencing real estate even more was TRA 86’s lengthening of the write-off period for depreciable real property. This also had the effect of further reducing the marketplace value of real property. Before 1986, under the Accelerated Cost Recovery System, the cost of an investment in real property could be written off over 19 years, using the 175% declining balance method of depreciation. This method allows a larger percentage of the investment cost to be written off in the last years of the depreciation period.
TRA 86 not only lengthened the price recovery period of most real property–non-residential property to 31.5 years and home local rental property to 31.5 years and home local rental property to 27.5 years–it also removed the 175% declining balance write-off method. Instead, the user was required because of it of the straight-line method. The changes in the cost recovery provisions significantly decreased the present value of real property tax write-offs and, hence, increased the present value of the taxes to be paid on the returns on investment in such property.
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The result was a decrease in the value of the investments. 25,000 in losses from “active” income sources. Nondeductible costs may be carried over to future years when aggressive income might be recognized, but as shown above, this deferral of the deduction must reduce its present value. For investors subjected to this limit, then, today’s value of their tax liabilities on the investment’s earnings increased.
In turn, this exerted a depressing effect on the market value of real property significantly. To 1986 Prior, much real estate investment was done by passive investors. It was common for syndicates of investors to pool their resources to be able to purchase property, residential, or commercial. They would then hire management companies to run the operation. TRA 86 reduced the worthiness of the investments by limiting the extent to which losses associated with them could be deducted from the investor’s gross income. This, in turn, motivated the holders of loss-generating properties to unload them, which contributed further to the problem of sinking real estate values.
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