Interesting Response to the Government's Homebuilder Bailout

Hat tip to BoomBustBlog member Christopher Alleva for contributing this interest comment on my Homebuilder Bailout post.

From 2002 to 2006 these Builders reported taxable income of $52 billion, based on a 39.3% tax rate, these builders have paid more than $20 billion in taxes during this period. So far these builders are reporting $10.6 billion in pretax losses for 2007. Under current law, they can only claim refunds for taxes paid in 2005 and 2006, $10.7 billion at the 39.3% rate, which means collectively they've run out of carryback losses for future years, including 2008. Each builder's tax position is unique but to the extent they claim refunds they may consider writing down or selling assets to realize the losses. The nation''s largest builder, Lennar has been most aggressive on this front claiming more than $3 billion in losses for 2007 allowing them to claim most of $1.2 billion in taxes they paid in 2005 and 2006.

Based on my calculations, extending the loss carryback period to 5 years would make an additional $10.8 billion available for refunds, not an inconsiderable sum. This analysis only shows the 15 largest builders. These builders account for roughly 33% of the market. Extrapolating these results to the complete universe of builders, extending the carryback period 3 years would yield a tax benefit of nearly $33 billion industry-wide. Putting this in perspective, in 2006, the Treasury Department reported $354 billion in corporate tax receipts. Had the builders won this tax break, the lobbying cost amounts to such a small fraction as to be indistinguishable from 0.

See chart below...

Click on the chart to enlarge and clarify.

Comments

[ACapitalist:]

Generaly, write downs in value are not tax deductable so only the losses that arise from actual sales losses are will result in tax refunds. There are builders, as well as financial companies, that are selling assets at losses to get those tax refunds. However the vast majority of the losses being reported are just mark to market adjustments.

2008 Feb 29 02:25 PM

[StrategicIn...:]

Is that because the write downs are not considered operating expense?

Aren't changes in inventory valuation are bookable as operating income or loss, especially if the impairment is considered to be "permanent"?

2008 Mar 11 05:16 PM

[Chris Alleva:]

To ACapitalist, yes it is true that write down reserves-book entries- are not deductable. It appears that this effort was at least in part driven by Lennar. Lennar has been by far the most aggressive in valuation write down recognition. The transaction they did with Morgan Stanley was structured with the tax loss objective front and center.

Keep in mind that public builders account for only 1/3 of the market share. Private companies have more lattitude to report write downs and would tend to be tax driven in their structure and presentation.

2008 Mar 12 09:45 AM