This issue is of profound importance to real estate investors.  Please read every word of this article right now.

The current front page news is the bonuses totaling around $165 Million received by executives at the huge financial services company AIG.  The reason there’s such an uproar is because AIG has received approximately $170 Billion in bailout funds from the federal government, and so it seems unreasonable that anybody at AIG should receive a bonus of any type.

To be clear, I think that the execs at AIG should “man up” and give back the bonuses.  I can’t imagine how it’s reasonable to receive bonuses for a company that has been so poorly managed that it needed to take $170 Billion to keep it in business.  But the reality is the AIG Executives are contractually entitled to what they’ve received, so the bonuses themselves are not the real issue.  The real issue is how the government is responding to this.

This is the real issue:

U.S. Representative John Dingell (Democrat from Michigan) has proposed that these bonuses be taxed at a rate of 95% as a way for the government to recoup some of the bailout funds given to AIG.

That might appeal to you on some level.  After all, AIG received $170 Billion in bailout funds, and now the AIG executives are receiving about $165 Million in bonuses.  So in some way, it feels “right” for their bonuses to be taken from them.

But that’s the problem…

I need for you to follow me closely in this explanation, because this can have direct effects on the real estate investing business if we stand by and let it happen.

Here’s the problem:  Congress is headed in the direction of deciding to take away money from a group of people who received that money legally.  And let’s be clear about this:  The bonuses received by the AIG execs were 100% legal, despite the incredibly distasteful nature of the bonuses.  Here’s why:

• Each of those AIG executives had contracts in place prior to AIG’s receipt of the bailout funds.
• Senator Chris Dodd (Democrat-Connecticut) personally took action to make sure that nothing about the injection of bailout funds into AIG would ever effect the existing employment contracts.  (This makes Chris Dodd an absolutely deplorable human, as he’s now leading the charge about the “inappropriateness” of the bonuses, even though he personally guaranteed that those bonuses would be paid.)

So what we have is the government deciding what they think is right or wrong in a specific circumstance, and using the power of taxation to penalize the people who they think have “gotten away” with something, even though absolutely no laws have been broken, no charges have been made, and certainly no convictions have occurred.

HERE’S THE CONNECTION TO REAL ESTATE INVESTING:  Right now, the real estate market is front-and-center on the national stage.  While the news has been very bad about the real estate market in past months, we all know that the greatest profits are made in bad rather than good markets because there are more opportunities to buy at great prices.

Presently, we have the government sticking its nose in the private real estate market by propping up mortgage lenders financially.  Additionally, the government is literally paying off lenders and servicers to accept loan modifications that make no sense whatsoever.

Where I fear this leads is to the government deciding that it should have influence over how much money that you and I as real estate investors can make, and then taking aim against us specifically later on by taxing our profits at confiscatory levels.

Here’s one way it could play out:  Let’s say that you pick up a property with distressed owners.  These owners have taken advantage of every government program they can to keep their property.  After all, the owners originally paid $250,000 for it and they think they should keep it.  So they do a government-induced loan modification and maybe even refinance the property using the U.S. government lender (Fannie Mae).

And, of course, things don’t work out for them.  The property drops in value to $150,000 and you are able to get it for $120,000 through a short sale.

Good for you, right?

And then things get better - the market recovers over a couple of years, and the property is suddenly worth $250,000 like before.

Again, good for you, right?

Maybe not.  What if that lying, thieving and disgraceful Senator named Chris Dodd decides that the government has more rights to your income than you do?  His justifications would be simple and plausible (but 100% wrong):

• The property was propped up by the government.
• The short sale was probably approved as a result of one of the government bailout programs
• The fact that Fannie Mae was involved might give the government some claim to a portion of your profits also.
• The government stimulus program was responsible for the recovery of the economy and the increased value of your real estate.

And based on that, the criminals in Congress could create a new law to retroactively tax people who behaved wisely, legally and opportunistically during an economic recession.  People like you.

Do you think it couldn’t happen?  Why do you think that?  Remember:  former Democrat President Bill Clinton instituted retroactive tax increases, so there’s precedent for the current occupant of the White House.

If Congress would take action to steal $165 Million - a relatively small amount of money - back from AIG executives, you can be sure that the real estate market would be a great target for them.  After all, if only 50 investors in each of the 50 states were to experience a real estate profit of $100,000 or more during the recession, that would be $250 Million - significantly larger than the size of the AIG executive bonuses.

And you can be damn sure that there will be far more than $250 Million in real estate profits created by smart investors during this weak market.

My friend, this is a serious matter.  The notion that Congress would target a tiny group of people for confiscatory and unjustified taxation is really scary.

I’m thinking that the Tea Party thing that’s happening all over the country is sounding like a really good idea.

Thank you for reading RealEstate.BryanEllis.com.  Your thoughts and comments are welcomed.