Support HR 3440 to allow builders and rehabbers to use installment sale tax method. Write to your Congressman!

Prior to the "Tax Reform Act of 1986", investors, builders, dealers and rehabbers were allowed to elect Installment Sale Tax Treatment (Method). Briefly stated, Installment Sale Tax Treatment (Method) allowed any person or entity to hold a note and receive payments over an extended period, and pay the tax owed as the money is received. The Tax Reform Act of 1986 disallowed "dealers" and "builders" from enjoying this tax treatment. From that point to the present, the entire tax is due in the year of sale, without any regard as to when the profit was actually received.

This punitive situation was an unintended consequence of Congressional action and has kept many rehabilitators and investors from holding notes and mortgages. An additional consequence of the tax code change is if the buyer defaults, the seller/note holder will have to amend their tax return, as they did not receive the anticipated profit that was reported.

HR 3440 would amend the Tax Reform Act of 1986 and allow dealers in real estate to use the installment sale tax method. You can view HR 3440 in it's entirety here: http://www.govtrack.us/congress/bill.xpd?bill=h111-3440

 

Please contact your Congressman. Click here to get your Congressman’s contact information.

Here is a sample letter or email.  If you are a BostonAREIA member, login with your member login, and go to the Library section for a template.

 

Dear Congressman____________:

We ask your support and co-sponsorship of HR 3440, “Installment Sales”, sponsored by Congressmen Pascrell (D-NJ), Cantor (R-VA), Roskam (R-IL), Adler (D-NJ) and Lance (R-NJ). In light of the continued downturn in the real estate market coupled with the need for visible stimulus for the housing and construction market, there is a need to modify IRC Code 453 “Installment Method” that will move the economy onto more solid footing. Changing the tax code to allow builders and rehabbers (groups defined as “dealers” under the Internal Revenue Code), to use installment sale tax treatment would benefit all parties involved along with the nation as a whole.

Prior to the ‘Tax Reform Act of 1986”, investors, builders, dealers and rehabbers were allowed to elect Installment Sale Tax Treatment (Method). Briefly stated, Installment Sale Tax Treatment (Method) allowed any person or entity to hold a note and receive payments over an extended period, and pay the tax owed as the money is received. The Tax Reform Act of 1986 disallowed “dealers” and builders” from enjoying this tax treatment. From that point to the present, the entire tax is due in the year of sale, without any regard as to when the profit was actually received. This brought about an immediate cease in the rehabilitation of many communities by investors.

 This punitive situation was an unintended consequence of Congressional action and has kept many rehabilitators and investors from holding notes and mortgages. An additional consequence of the tax code change is if the buyer defaults, the seller/note holder will have to amend their tax return, as they did not receive the anticipated profit that was reported.

As you are aware banks, credit card issuers etc are allowed to pay tax on income as it is realized. We believe this allowance should be extended to businesses in the real estate and construction industries as well to help revitalize them and to see new building take place.

The industry has informed us that many builders and rehabbers would welcome the opportunity to create notes and mortgages if they were allowed to pay the tax in the year that the money is actually received. It would help them create a solid predictable cash flow to even out their business activities, thereby helping to keep the national economy on a pro-growth path.

The following examples demonstrate the positive benefits that allowing for the reinstitution of Installment Sale Tax Treatment will create:

Stabilize the balance sheets of financial institutions – with private parties (rehabbers and builders) holding mortgages, many of which would be in a junior lien position, notes and mortgages issued by financial institutions would be more secure. The financial institution’s notes would have a lower loan to value ratio, resulting in more safety and liquidity.

Financial Institutions Exposure to Foreclosures - with private parties holding junior liens and wishing to protect their investment, if the home owner / mortgagor gets into financial distress, these private parties would be better equipped to deal with the situation on a more personal, results oriented basis. This will have the effect of providing an extra degree of safety for the financial institutions first (superior) mortgages.

Lower Risk to Fannie Mae and Freddie Mac – As the loans insured by Fannie Mae and Freddie Mac carry a lower LTV ratio, they would be of less risk and higher quality thereby putting less strain on their portfolio. They would have more access to capital. Risk would be spread among the thousands of investors who will be holding the second mortgages, not to the government, its quasi-government agencies, and the taxpayers.

Strengthen the Financial Health of Builders and Rehabbers– By allowing Installment Sale Tax Treatment to be taken by Builders and Rehabbers, more properties could be sold quickly, creating a safe predictable cash flow and a more stable tax base.

Improvement in the Nation’s Housing Stock – By allowing rehabbers to elect installment sale tax treatment, properties in run down neglected areas would be rehabbed creating jobs and economic growth in these communities, increasing property values and this would be done primarily with private dollars. Taxpayer exposure would be minimized and blighted communities would spring back to life as vibrant desirable neighborhoods.

Create Employment Opportunities in Construction and Ancillary Businesses – by allowing builders and rehabbers to use elect installment sale tax treatment, the number of new houses and renovations will rise. This will create jobs; in the construction trades, for manufacturers of building materials, building supply dealers, real estate, property managers, bookkeepers, etc.

Stabilization of Real Estate Values allowing for a Steady and more Predictable Tax Base – with financing more plentiful and risk diminished, property values throughout the nation will have a more solid foundation and can avoid precipitous ups and downs. As a result, a more predictable and stable appreciation of values will create a more stable tax base.

Help Keep Home Ownership Levels High – With the builders and rehabbers able and willing to provide some of the financing available, the number of Americans that will be able to own their own home will increase.

Increase Government Revenues – With a change in IRC Code 453 “Installment Method”, thousands of builders, rehabbers, investors and dealers, throughout the nation would be ready, willing and able to buy, renovate and improve properties.  Tax revenue will increase exponentially and flow into the government coffers. The tax rate would be based on “ordinary income” and paid as it is received.

Because of this inequity in tax treatment over the last twenty years, many investors, dealers, builders and rehabbers have passed on many potential opportunities that could have resulted in the continued rehabilitation of many urban and older communities.

Therefore we ask you to support and co-sponsors HR 3440   and help truly bring renewal to our housing market, increase construction jobs and relief pressure from the financial markets.

Sincerely,