Friday, April 9, 2010

Obama Health Care Bill Will Cause Price Decline in Rental Property Values

Mr. Obama's new health care bill places a new tax of 3.8% on all so-called "unearned income" including dividends, interest, and rental income for taxpayers making above $200,000 per year.

The new tax, now cynically called an "unearned income Medicare contribution", is really just another surtax imposed by Mr. Obama to get "wealthy" Americans to pay for his health insurance scheme.

Anyone who has ever managed rental properties and all the headaches tenants can give you know that rents are EARNED income.  I find this Orwellian definition of rental income offensive and ignorant.

But more importantly, imposing a 4% Federal tax on rental income has to depress the prices of rental properties by at least that much.  Use any capital asset pricing model ("CAPM") to get the actual value with respect to any property.  When the costs of owning an asset, or more accurately, owning its income stream rise, the value of the asset must fall to adjust the yield for investors relative to another investments or uses for capital.  This is basic Corporate Finance 101. 

So at a time commercial real estate is struggling, and the banks who hold this paper are afraid for dear life, the Federal government decides to milk this sick cow for another 4% per year.

What a way to run an economy.

Robert J. Abalos, Esq.