Perhaps you’ve heard the news.   The economy is a mess.  Housing inventory is extremely low.  Interest rates are pretty high. The result is gridlock for many industries and families whose aspirations of building a better life are stifled by an accelerating cost of living and no sign of the economy keeping up with it.  Washington, we have a problem. The housing crisis can be remedied, the economy stimulated, and interest rates lowered in two steps. I acknowledge that policymakers are not interested in any of my amazing ideas that would help our country trust the government more or operate more efficiently.

No politician ever came calling about my idea of limiting every bill to 8 pages so that it is clear to everyone what is being voted on.  This would eliminate all of the garbage that’s thrown into 4,000-page bills.  If your proposed bill requires more than eight pages, then there will need to be two bills and two votes.  How’s that for accountability?  We would know exactly what every politician voted for and against.  But, sadly, we still have enormous bills with fat spending hidden in them from both parties, and we continue to have out-of-control spending, and no one actually knows everything that’s being voted on.

So, the politicians are not asking, but you have an interest. I’m grateful for your humoring me by reading this far.  So, let’s lay out the two-step process for solving the housing crisis and stimulating the economy.

(Disclaimer:  I’m about to ruffle some feathers.  I’m OK with that.  I welcome the opposing opinions. Especially if they offer solutions and not just anger.)

Step #1:  Cut or Cap the Tax Code Benefits to Real Estate Investment There are three huge reasons for investing in real estate.  One is for cash flow.  Buying the right property at the right price can generate significant revenue for the owner.  While this may not be the primary wealth vehicle for most investors, it is important.

The second reason to invest in real estate is to gain equity.  This is where investors gain wealth from time passing by and potentially add strategic improvements to the property.  This is an excellent motivation for investing.

The third reason is the tax benefits of investing.  With depreciation, the ability to grow wealth without paying capital gains, and the numerous other strategies that can be used to reduce an investor’s tax liability, investors have significant incentives to buy real estate.  This may be the most important reason for many investors.

Real estate investing is a brilliant strategy for building wealth.  Most of my net worth comes from real estate.  With all these reasons to buy a rental property, it’s no wonder investors are going all into this strategy. But, it is stalling out the market for home ownership. As corporations and individuals are buying homes at an alarming rate–many of which come from the first-time home-buyer category–many Americans cannot enter the homeownership population, thus limiting their opportunity to build wealth.

Step one of the strategy is controversial.  Any action to get us out of this crisis will be controversial.  But, the first simple step is to remove or cap (reduce to a certain number of properties or a total asset value) the tax benefits of real estate investing.  This policy change will motivate investors to release their inventory and create more movement in the housing market.  When corporations and high-income individuals have fewer tax deductions from real estate, they will find other vehicles to put their wealth-building strategies into to build wealth.

(Investors, stick with me.  You have an even better opportunity ahead.)

Step #2:  Incentivize Investors to Invest in Small Businesses Small businesses are critical to the U.S. economy.  They provide jobs.  They provide services and products the public needs or wants.  They help money move throughout the population, which is what the economy needs to be healthy.  Government policies and tax codes can dramatically impact the ability of small businesses to survive.

This step requires two strategic policy moves:  increase tax incentives for small business ownership and create a vehicle for investors to transfer equity from real estate into small business without paying capital gains on the sale of their real estate investment. Let’s break that open a little more.

Create small business tax policies similar to those investors currently have in real estate (1031 exchange, depreciation, capital gains advantages, etc.).  These policies may be limited to businesses up to a specific revenue point (for example, businesses between $100k-3M would be eligible for these tax reduction opportunities).  Motivate investors to take their systems-thinking of creating passive income through real estate into the business space.

Imagine if an investor made his passive income by owning 30 businesses instead of 30 houses.  Those businesses provide jobs, services, and value to the community and are great wealth opportunities for the owner-investor.  When they hire the right people, like investors hire the right property manager, they can have an excellent passive income with great earning potential.  This creates great jobs while building wealth.

Phase 2 of this step is to put strategic tax policies into effect for transferring investments to business. This is much like the 1031 exchange investors can use to move their investment from one property to another without paying capital gains.  In this strategy, the investor can pull their equity out of the real estate asset and put it into a small business.  The investor’s knowledge of money, systems, and wealth-building is moved into a revenue-generating business that creates jobs. This policy increases the movement of money within the economy and improves the overall economic position of the U.S.

That’s the fix.  Many won’t agree with this–especially if you own real estate.  I get it.  That is part of the barrier to solving this issue since many politicians build their wealth through real estate. So, I know the likelihood of this becoming a reality is low.  But it seems to make sense to me.

I’d like to hear from you. What works in this model? What’s broken?  Let’s hear your take in the comments below.