3Center for American Progress | Rehabilitate to Rent: Focusing Resources to Revive the Housing
planning o ake advanage o he so-called “carried ineres” ax advanage. Carried iner-es ax reamen means ha when enrepreneurs pro rom puting hese deals ogeher,hey pay only low capial gains raes insead o he 35 percen ordinary income rae ha Americans in higher ax brackes pay on service income ha hey earn.On op o his, cerain exising ax code incenives ha were inended o unnel privaeinvesmen ino home ownership are a he hear o exacerbaing he oversupply o oreclosed homes siting on he marke. Vas amouns o invesmen in subprime andalernaive morgages owed hrough eniies called real esae morgage invesmenconduis, or REMICS, which enjoy a special ax break. REMICs would normally pay a business-level income ax (in addiion o he ax invesors would pay on he income hey receive rom he REMIC), bu he ax code gives REMICs a special exempion, addingo billions in oregone governmen revenue each year. Te exempion is mosly inendedo atrac privae invesmen ino he home morgage marke.Bu REMIC invesors are only supposed o keep his ax break i hey are makingloans, no i hey are piling up and siting on oreclosed houses. Commenaors suchas ormer Assisan reasury Secreary Michael Barr (beore he joined reasury, whilehe was a senior ellow a he Cener or American Progress) and ohers havelongnoedha he rules REMICs operae under conribue o he glu in he marke andhe lack o loan modicaions and principal reducions ha would avoidurher ore-closures. New special ax breaks or privae invesors in oreclosed homes may urnou o have similar uninended negaive consequences in he uure.Some ailored governmen acion o help overcome hese marke ricions may benecessary o accelerae he pace o rehab-o-ren, bu an across he board ax subsidy is he wrong approach.
A better approach for rehab-to-rent
Insead, he ederal governmen should dedicae resources o reducing he specic barrierso paricipaion in rehab-o-ren. Te public’s ineres would be beter served by a argeedsubsidy o give mission-driven nonpro groups a prominen sea a he bidding able.Tese groups almos always have access o less capial han or-pro invesors, whichcould impede heir abiliy o buy REO properies in bulk. Bu hese eniies end o haveclose communiy ies and a vesed ineres in neighborhood sabilizaion, which meanshey’re more likely o keep he rens aordable and reain a long-erm sake in he propery.Ta’s a goal worhy o invesing public dollars.