When government gets involved in real estate, it usually messes up things. What is "fair" and "right" (phrases used by many public servants, but not meaning the same thing that you or I would believe are "fair" and "right") don’t necessarily make good business sense.

On the other hand, property owners do pretty well by the exemptions and benefits afforded them through interest payment and tax deductions, property depreciation and other financial gains enjoyed through real estate ownership and investment.

Nevertheless, a new study released by the Millennial Housing Commission could bring about some good things for investors, developers, renters and homeowners alike. The Commission, established by Congress in 1999, was charged to:

• look at the importance of housing to the national economy,
• investigate various methods of increasing the private sector in providing affordable housing; and
• determine whether existing federal programs work well or do they need to be revamped or eliminated.

After nearly three years, the commission has begun touting its report to members of Congress, hoping it will bring about substantial policy changes to increase homeownership in the U.S. and foster affordable housing.

The Commission is calling for implementation of new tools, as well as reforming and streamlining existing programs. Some of the new tools could be quite interesting to see if they come to fruition.

For instance, investors currently must pay large taxes on their gain once they sell a property and take the money out of it. Section 1031 in the IRS code allows them to defer their tax payments on capital gains and roll the money into another real estate purchase, thus reducing their tax bill. Once they finally sell the property to "cash out" the taxes they pay are hefty.

To enhance preservation of affordable housing units, the Commission recommends Congress "enact a preservation tax incentive that would provide tax relief in order to encourage sellers to transfer properties to ‘preservation entities’ committed to preserving the stock as affordable housing."

If an investor in affordable housing knew he could sell the project to an affordable housing group without getting bitten by high taxes, this could definitely be an incentive to keep the housing in the hands who need it most – the poor and low-income renters.

Another idea that may need more massaging, but has merit, is that of providing financial subsidies for construction of housing for extremely low-income renters. This would be for households with income less than 30 percent of the area median income. (I.e., recipients in a community with a median income of $50,000, would have to make less than $15,000 per year.)

The subsidy would be an outright grant to the family. My rework on this idea would be to have the buyer contribute something. The idea of ownership is that the buyer "bought" a home and is proud to own it. Giving a condo or house to someone removes the concept of ownership. Many of those who receive handouts expect more handouts later – like when the hot water heater breaks or the dishwasher causes water damage. By paying for a portion of the house, they have participated in the purchase of the unit and should feel like they must take care of it themselves.

In addition to the above grant program, one of the ideas under the Commission’s "Streamlining Existing Programs" is to establish a work requirement linked to housing assistance. MHC Executive Director Conrad Egan mentioned at a Fannie Mae housing conference during his presentation on the report last week that this was a "controversial recommendation among the commissioners." Fortunately, it made it to the final draft.

"Through a combination of work requirements and supportive services, move assisted families up and out of assisted housing units, and reduce the disincentives to work and marriage," according to the study.

The Commission’s report has some good ideas and some not so good ideas. You judge for yourself – the full report, including an online Power Point presentation, is on the group’s web site at www.mhc.gov.

Published: June 14, 2002

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Mr. Carr has covered real estate since 1989. He is the author of Real Estate Investing Made Simple. Got a personal real estate issue? Post your questions and comments at Anthony’s blog: commonsenserealestate.blogspot.com.