The plan is for the government to purchase these securities at low prices and sell them at a later date at higher prices for a profit. This way the government helps out the financial industry and the economy with an opportunity to make the money back. The government also has the opportunity to request an ownership stake in the companies that it bails out.
Another key component of the legislation is that it authorizes the Securities and Exchange Commission to suspend a set a rules known as mark to market accounting. The current rules require banks to take losses on all of the bad mortgages regardless of whether or not they are able to sell them off in the future at a profit. As a result, it ties up capital because the banks are required to have a certain amount of assets on the books in order to be able to lend out money.
So how does the bailout affect real estate investors?
The major impact on real estate investors is that it serves as a stop gap to ensure that there will be capital available for purchasing investment properties. One of the biggest fears prior to the bailout being passed was that lending capital was going to dry up. As a result, if you purchased property with ANY type of lending capital, you were at risk of not being able to get the money that you need to fund deals.
Another component of the bill that can have a major impact on many real estate investors is the legislation involved the AMT known as the Alternative Minimum Tax. This is a tax that affects anyone that has a gross income of over $75,000. There are a number of deductions that you get as real estate investors that you don’t get if you fall under the AMT.
What the bailout bill does for this is it inserts a provision that basically ensures that the AMT will not be applied to about 24 million households that normally would fall under this tax. As a real estate investor, particularly if you are making money in real estate, there is a good chance that you would have falling under that tax code if this provision wasn’t applied to the legislation.
Regardless of whether you are for or against the bailout, the key takeaway is you want to understand how this affects your real estate investing efforts. This way you will know exactly what modifications you may need to make to your overall investing strategy if any.