Mortgage Interest Deduction Could Hurt Commercial Real Estate Value

Mortgage interest deductions are what fuel the U.S appetite for debt, and its elimination could result in savings that profit the country. But the deductions don’t just motivate debt; they also motivate commercial real estate investors. In addition to appreciation, leverage, and depreciation, newcityfinancial.com has determined that mortgage interest deductions are also a key reason for commercial investors of today buy property.

How Commercial Real Estate investors benefit from Mortgage Interest Deductions

In an effort to drive property value, commercial real estate investors take advantage of interest deductions to account for the expense incurred to leverage their real estate as well as tax savings on their leveraged cash flows.

If mortgage interest deductions for commercial real estate would be removed, returns on a property would be significant. In fact, such a move would largely affect property valuations all over the country, which is not ideal seeing that we’re already struggling to come to terms with corrected valuations. Because of mortgage interest deductions, commercial real estate investors are able to minus the amount of interest they pay on their property from their cash flow prior to tax.

Why Does IRS allow Interest Deductions?

The reason why investors are allowed by IRS to deduct their mortgage interest is that it is paid as an expense to the lender and the tax paid on the interest by the lender is then his/her income. If mortgage interest deductions were to be eliminated by IRS it would mean property owners don’t profit from the deductions as an expense. Fewer property investors would, therefore, be motivated to borrow money for purchasing a property.

Another possible effect of elimination of mortgage interest deductions would be a decline in commercial real estate values. This is because investors often use tax regulations in revaluing investment properties. So with no tax deductions, this would not be possible and consequently, there would be fewer properties existing.