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The Democrats’ Tax Plan Would Sink Real Estate

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The most lasting effects of government policies are often the unintended consequences. Americans learned this lesson the hard way in the aftermath of the 1986 Tax Reform Act. The tax proposals in the Democrats’ $3.5 trillion budget-reconciliation bill have the potential to kick off economy-crippling events similar to the savings-and-loan crisis of the late 1980s.

The landmark 1986 Tax Reform Act reduced the top personal income-tax rate from 50% to 28%. The politically divided Congress paid for these cuts, in part, by raising the rate on capital gains from 20% to 28% and limiting the deductibility of real estate losses for passive investors. The unintended consequences were many and profound.

As the new rules were phased in, investment capital dried up and asset values collapsed. Rents rose as landlords refused to pay their mortgage interest with nondeductible cash. Many other landlords “mailed back the keys” to the S&L…

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