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RCA Technology & Intelligence Briefings Issue 2Interview with Linda Goold— First Quarter 2006Linda Goold E-mail:lgoold@realtors.org Linda Goold serves as the Director of Federal Tax Programs for the National Association of REALTORS® (NAR). She is an advocate for NAR tax policies that protect and enhance ownership and investment in both residential and commercial real estate. Listen to the interview (mp3 format, 17MB). Prospects for Tax Reform 1. Hearings on tax reform proposals and legislation are likely to take place throughout the spring; expect discussion about broad themes such as revenue, how much the rich should pay and who should be relieved of income tax requirements. 2. Many themes are worth talking about because they would be helpful to taxpayers and useful in simplifying tax returns for small businesses; almost all the provisions concerning real estate in the report from the President’s Tax Reform Advisory Panel are controversial—two in particular are relevant to the commercial side of the industry. Depreciation Life 1. Depreciation during the holding period is being reviewed; currently, the depreciation life utilized by owners of commercial real estate is 39 years and an even longer period is being proposed. 2. Under current law, a straight-line method of depreciation is used; the report recommends a declining balance method to depreciate real estate; the allowance is just 3% a year, which has the effect of extending the life of commercial property to about 45 years—this seems like an outdated approach. Capital Gains 1. The report is silent on the topic of lifetime exchanges, so whether or not they would continue under an eventual plan is not known. 2. One plan corresponds to current law—capital gains would be taxed at 15%, at least through 2008; under the other plan, there would be no capital gains treatment for real estate—any recognized gain would be subject to taxation at ordinary income rates. 3. The proposed top rate in that recommendation is 33%, which means that the top rate would more than double for owners of commercial real estate; one small provision actually benefits securities so that the tension between securities and real estate as investment choices is underscored. TIC Transactions 1. Most investors in tenant-in-common deals are coming out of like-kind or 1031 exchanges; the ability to conduct 1031 transactions is an issue dealt with in the details of the report, although there is no specific mention of like-kind exchanges. 2. If all capital gains would begin to be treated as ordinary income, keeping like-kind exchange treatment would be imperative; NAR is working hard to preserve this valuable tool by making Congress aware of how useful it is. 3. Organizations like the Sierra Club and school boards also value like-kind exchange because the strategy enables them to assemble property for open space and schools, respectively; they were allies of NAR during the last battle on the issue in 1991 and continue to be allies. Modifications to NAR Policy on Tax Reform Guidelines 1. The idea of expensing mortgage interest reduction has been around for a long time and has been popular with small business and manufacturing industry advocates. 2. The concept is that the cost of any investment should be deducted in the year in which it is incurred—there would no longer be depreciation; a corollary would be an unlimited carry-forward period. 3. NAR’s concern about this proposal is that it would encourage a return to tax shelters. 4. The tax proposals are of major importance to the commercial real estate industry, which was devastated by Congressional reforms in 1986 Tax Reform Act that crippled real estate commercial investment. 5. Looking back as far as the 1986 Act proves that both a 15-year and a 19-year depreciation life were too generous; going to expensing, i.e. a flat-out deduction seems dangerous for real estate and other long-term assets like public utility property, train tracks, etc. 6. The trade off for eliminating depreciation would be disallowing interest expense deductions; NAR on the residential side opposes any changes to the mortgage interest deduction; if the commercial side were recalibrated, questions about interest would have to be considered in the context of how depreciation rules were treated. Commercial Market Comparisons—1986 and Now 1. The lesson from the 1986 Act is that if the tax benefits associated with real estate are changed without adequate transition and grandfathering protection, the value of real estate in the hands of the holders will go down. 2. The current commercial marketplace is remarkably different from 1986; from 1983–1985, too many buildings were built for tax write-offs by people unfamiliar with the industry; that situation does not exist today—people are looking for value and return on investment. 3. Commercial real estate deals today are more balanced between debt and equity; even existing depreciation rules make getting undue tax shelters or write-offs difficult. The Process for Developing Recommendations 1. The process followed by the President’s Tax Reform Advisory Panel was an open one; NAR submitted comments twice and made a number of recommendations during the period when the panel put its report together. 2. NAR’s main message to the panel regarding commercial real estate was to be careful not to precipitate a market decline again. 3. Once the legislative process begins, commercial professionals should keep in touch with the RCA for ongoing updates on developments. 4. As crucial votes are taking place, the RCA will call on members to contact their Congressmen, Senators and various legislative committees; nothing carries more weight than hearing directly from constituents. Other Advocacy Issues 1. A few years ago, NAR was successful in getting a much better rule for lease-hold improvements—the previous 39-year depreciation life (which far exceeded the life of leases) was reduced to 15 years; the provision is temporary and gets renewed every year; NAR would like to see it made permanent and even more favorable. 2. A Katrina relief provision enacted in 2005 allowed hurricane states a deduction for demolition and non-brownfields cleanup; usually those expenses have to be capitalized into the basis of the land. 3. Deductions for brownfields cleanup expire regularly; NAR manages to get the provision renewed year after year; it is in the process of being favorably expanded to include petroleum as well as superfund contaminants; these initiatives facilitate the cash flow on any of the costs for site preparation. Reference Sources 1. Current briefings on the status of tax reform proposals and legislation are available through Realtor.org from the government affairs area of the site or from the RCA site. 2. For technical descriptions of proposed legislation, visit the Congressional web site for the Joint Committee on Taxation. 3. The online publication Tax Notes offers reports through both a subscription service and a free service. 4. Daily reporting from The Wall Street Journal, New York Times and Washington Post are also good sources. Products and Sites mentioned by Linda Goold: Realtor.org: www.realtor.org Joint Committee on Taxation updates: www.house.gov/jct/ Tax Notes: www.taxanalysts.com/taxnotes Daily reporting: www.wsj.com www.nytimes.com www.washingtonpost.com |
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