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ABLI members testifies for major tax revision.

Arnold Gruber, a partner at Marks, Shron & Company, one of Long Island's largest accounting firms, and an executive board member of the Association for a Better Long Island, (ABLI) told a Congressional hearing on tax and entitlement policies today that federal tax law revisions in 1986 devastated the value of commercial real estate property, distorted the economy and contributed to one of the worst recessions in a generation.

Gruber, of Great Neck, told Congressmen Thomas Downey (D-2nd C.D.) and Raymond McGrath (R-5th C.D.), both members of the House Ways and Means Committee, "Real estate is as crucial a component in the nation's economy as automobiles, durable goods and technology leadership. Tax changes profoundly changed the ground rules for real estate investment and the earth has been sliding beneath our feet ever since - taking much of the economy with it."

The Banking System in Retreat

In prepared testimony, Gruber stated, "In many instances the value of the real estate has declined so significantly, that the property is not even worth the amount of the debt. Consequently, all investor equity has been lost and the banking industry now bears the entire economic risk of further declines in value."

Gruber also noted that the reduction in real estate value has affected tax revenues, since the profits and earnings that the real estate industry might otherwise have earned in a better economic climate are not being generated. The results are being felt across the Island as governments struggle to closing gaping deficits.

"Since the tax law has become so unfavorable to real estate, there is no incentive to make an investment in this area. As a result, there is virtually no market for real estate except at |fire sale' prices, and then only on selected properties," warned the ABLI leader.

Residential Prices Also Affected

Gruber says the crisis in real estate goes far beyond commercial real estate. Residential owners have seen the value of their homes plummet and this decrease in home values has contributed significantly to the lack of consumer confidence.

"As a result people are afraid to purchase a new home. The slow-down in new home construction and loss of value is due to several factors including the fear of individuals to make long term financial commitments, a fear of losing their jobs, uncertainty as to whether the value of real estate will stabilize," continued the accounting and tax expert.

Specific Changes To

Improve the Economy

Gruber is urging Congress to repeal the passive loss rules to attract new investment in real estate. He believes the loss of tax revenue to the Treasury from such a repeal would be significantly offset by the savings realized on the bailout of the banking industry, since the resultant increase in value of real estate would enable the banking industry to dispose of foreclosed properties at increased prices.

(Explanation of key component of the Passive Loss Rule - A taxpayer who materially participates in rental real estate is unable to get a current benefit of the losses, since those losses are treated as passive losses without regard to the taxpayer's participation. In other industries, a taxpayer who materially participates in an investment does get a current benefit of the losses, making that investment more attractive.)

In addition, Gruber believes the current Administration's proposals regarding passive loss rules do not go far enough. "The President's proposal to ease the passive loss rules solely for real estate professionals will not attract much needed equity capital to real [Illegible Word] te, since most equity capital has [Illegible Word] litionally been provided by other [Illegible Word] !stors,"a he stated.

Other specifics the ABLI leader is suggesting include: * A Congressional initiative to provide more incentives to build low-income housing

Although the current low-income housing credit is a good program it has not helped to alleviate the shortage of low-income housing. The ABLI believes the repeal of the passive loss rules will create more low-income housing than the credit program * A capital gains tax rate reduction which would benefit the economy and encourage capital formation for new enterprises should be passed * The first time home buyers credit advanced by the Bush Administration to encourage home purchases should be enacted. This credit will increase housing starts and resales of homes thus creating jobs in the real estate and construction sector of the economy * The disallowance of personal interest deduction should be repealed. The ABLI believes this will add both fairness and simplicity to the tax law, as well as encourage consumer spending to help stimulate the economy * An investment tax credit should be instituted to encourage investment and stimulate the economy
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Title Annotation:Association for a Better Long Island
Publication:Real Estate Weekly
Date:Mar 11, 1992
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