Since election day, the so-called “fiscal cliff” has moved to the top of the political news agenda, and CJR has already critiqued the shallow reporting and false frames on display in much of this coverage. Unfortunately, some of the reporting on the purported economic consequences of the “cliff” isn’t much better.
Consider an article earlier this week from The Washington Post, reporting in part that people are rushing to sell assets before year-end to avoid possibly higher taxes on investment gains. The story is a model of how not to do it.
“Financial advisers and accountants say people are trying to avoid the higher taxes that will take effect in 2013 if Washington does not avert the ‘fiscal cliff,’” reporters Michael A. Fletcher and Dina ElBoghdady write up high in the article.
Investors named? None. Named sources? One policy analyst, one accountant, one lawyer who claims he is “swamped” with business, one financial planner, and one real estate agent (not even a broker, but a sales agent).
Late in the story, the agent shares an anecdote that actually offers the most specific piece of evidence in support of the article’s thesis: he “said he has been approached by two people in the past 90 days who are eager to sell their investment properties before the capital gains rate jumps. One of them is furiously negotiating with two potential buyers as he tries to move his North Potomac townhouse before Dec. 31.”
That’s a thin reed. To test its hypothesis, the Post could have consulted with a variety of organizations that collect data on the real estate market—or even examined the trendline for listings of multi-family properties in its own pages, compared to earlier periods. And what of this basic economic fact, left unexamined in the Post’s report: If lots of owners are rushing to sell by a fixed deadline that should push prices down, offsetting some or all of any tax benefit.
But there are two more serious problems with this vague anecdote, and both are revealing about the muddled quality of much “fiscal cliff” reporting.
First, real estate prices have come down, so overall investments in real estate have muted profits to losses, not fat gains. Though they have recovered substantially from the low point in spring 2009, housing prices in Washington, DC are still down about a quarter from early 2006, according to the Case-Schiller index. At the end of September, home prices in the district were at about the same level as in the summer of 2004.
That means that many owners of investment properties face, if they sell, no capital gains tax. And if investors are poised to take losses, those losses may be more valuable under a regime of higher taxes, when they could offset gains on other properties. Such a scenario would augur for delaying a sale until taxes go up, not rushing it to beat the hike.
But the deeper problem is that the tax most likely to affect this “furiously negotiating” unnamed seller is not scheduled to change Dec. 31, when the Bush tax cuts are set to expire and long-term capital gains rates are set to rise. The levy in question is the so-called “recapture tax” on depreciation of buildings, a paper loss that is part of what makes investment real estate a tax shelter for buyers who qualify for the tax benefits. The recapture tax rate is 25 percent in most cases, and it is not scheduled to change next year. That crucial fact undercuts, if not obliterates, the premise of the Post anecdote.
Dean Baker, a liberal economist who spotted the housing bubble years before it burst, critiqued this same Post piece at his Beat The Press blog.
Baker initially misstated what the Post had reported, and commenters jumped on him. But their posts were also riddled with misleading statements. None seemed aware that recapture rates are not scheduled to change, among other misunderstandings.