Tax Reform recommendations target real estate.

On Nov. 1, the President's Advisory Panel on Federal Tax Reform issued its final recommendations to Treasury Secretary John W. Snow, who will make his own recommendations to President Bush by the end of 2005.

The report contained two proposals: the Simplified Income Tax Plan (SITP) and the Growth and Investment Tax Plan (GITP). The SITP would establish four income tax brackets; the GITP would establish three tax brackets. Both plans would repeal the corporate and individual Alternative Minimum Tax (AMT).

Also, both plans propose replacing the current mortgage interest deduction with a credit equal to 15 percent of mortgage interest paid during the tax year.

The credit would be capped to 1.3 times the Federal Housing Administration's mortgage limits, ranging by geographical area from $227,000 to $412,000. The panel also recommended eliminating the state and local tax deduction.

If implemented, the proposed changes would go far toward creating a more level playing field between rental housing and homeownership.

Although many provisions of the two plans are identical, they differ in the taxation of business and investment income. No specific mention is made in the recommendations of Section 1031 "like-kind" exchanges or the Low Income Housing Tax Credit, but it is suspected that both would be eliminated like many other deductions and credits as part of the "reforms."

While the complicated recommendations were just revealed and require exhaustive analysis, it is already clear that financing and owning multifamily housing and other commercial real estate under either alternative would require adjustments and generous transition rules to avoid the kind of dislocations that accompanied the previous Congressional effort at tax reform in 1986.

Supreme Court Hears Case on Limited Partnerships

The U.S. Supreme Court heard oral arguments on Oct. 11 in a case that could seriously undermine the value of limited partnerships (Lincoln Property Co. v. Roche, U.S., No. 04-712).

At issue is whether firms that are headquartered in one state and do business in another through affiliated entities, including partnerships, can continue to move cases to federal courts under federal "diversity of jurisdiction provisions" or whether they must defend themselves in state and local courts.

Diversity of jurisdiction exists when two parties to a legal dispute are from different states. It allows a lawsuit to be moved from state court to federal court to protect against bias in the plaintiff's home state.

NAA/NMHC organized and led a broad coalition of real estate organizations that persuaded the Supreme Court to hear the case. Throughout the Court's oral arguments, attorneys referred to NAA/NMHC's "friend of the court" brief explaining why real estate companies operating in several states use various affiliated entities. Several Supreme Court justices appeared critical of the appeals court's decision.

A final ruling is expected next year. If the court reverses the Fourth Circuit, it will be a significant legal victory for thousands of real estate firms throughout the country.

Bankruptcy Law Has Exceptions for Hurricane Victims

NAA/NMHC's eight-year effort to remove a loophole from the U.S. Bankruptcy Code that allows renters to abuse the system is finally complete now that the Bankruptcy Abuse Prevention and Consumer Protection Act (PL 109-08) went into effect on Oct. 17. The new law prevents residents from using a last-minute bankruptcy filing to avoid eviction by allowing property owners to continue eviction if they had obtained a judgment of possession before the bankruptcy petition was filed.

Earlier this month, the U.S. Department of Justice announced that it would relax some of the new law's requirements for victims of natural disasters. For information, see www.justice.gov/ust/press/pr20051004.htm and www.justice.gov/ust/press/pr20051005.htm.

Exit Tax Relief Bill Introduced

On Sept. 8, the Affordable Housing Preservation Tax Relief Act of 2005 (HA 3715) was introduced in the House of Representatives. The bill would provide "exit tax" relief to apartment owners who sell their properties to new owners who commit to preserving their affordability.

The legislation is intended to address the problem of owners who are hesitant to sell federally assisted housing (e.g., project-based Section 8, Section 236, Section 22 l(d)(3) or LIHTC) to preservation purchasers because of the capital gains tax burden they would face upon the sale. Specifically, the bill would exclude from taxation the property depreciation amount involved in a "qualified sale or exchange of eligible multifamily housing property." The bill also provides for a break in the capital gains rate for preservation sales.

Supreme Court Takes 'Isolated Wetlands' Case

On Oct. 11, the U.S. Supreme Court agreed to review two appeals court decisions next year concerning questions over whether the federal government can regulate "isolated wetlands" that are not directly connected to navigable waters, such as rivers and lakes (Rapanos v. United States, U.S., N. 04-134, 10/11/05; Carabell v. U.S. Army Corps of Engineers, U.S., No. 04-1384, 10/11/05).

In 2001, the Supreme Court called into question the scope of the Clean Water Act when it ruled that the U.S. Army Corps of Engineers (Corps) did not have jurisdiction over non-navigable, isolated wetland (Solid Waste Agency of Northern Cook County [SWANCC] v. U.S. Army Corps of Engineers, 581 U.S. 159).

In the wake of that decision, however, the lower courts have interpreted the SWANCC decision inconsistently; regulators have refused requests by NAA/NMHC and others for clarification and Congress has shown no appetite for clarifying the scope of the act as it applies to these wetlands.

The current interpretation allows for the exercise of federal jurisdiction over such waterways as man-made ditches, storm drains, gutters and curbside runoff, subjecting them to costly and time-consuming permit and regulatory requirements.

Recently, the Court agreed to review two separate rulings issued by the U.S. Court of Appeals for the Sixth Circuit against Michigan developers attempting to build an apartment community or a shopping center. NAA/NMHC is filing an amicus brief in the consolidated cases.

At issue are rulings by the appeals court that gave the Corps authority to restrict development on wetlands that were only connected to lakes and rivers via man-made ditches or drains.

NAA/NMHC welcome the Supreme Court's decision to revisit the Clean Water Act given the extensive uncertainty that currently exists.

ICC Finalizes 2006 Code Changes

The International Code Council (ICC) held its final action hearing in September to vote on changes for the 2006 ICC codes.

NAA/NMHC prevailed in almost all issues. The ICC approved a proposal to revise Section 716.5.3.1 so it no longer requires residential occupancies (including apartments) to have fire dampers in penetrations for kitchens, bathrooms and dryer vents.

The change will save the apartment industry approximately $150 per unit or $43 million in annual construction costs.

The ICC also disapproved a proposal to amend Section 907.2.9 and require fire alarms in apartments that have a sprinkler system. Passage of the proposal would have cost the industry approximately $500 per unit or $144 million in annual construction costs.

Information compiled by NAA/NMHC Joint Legislative Staff: Senior Vice President for Government affairs Jim Arbury; Lisa Blackwell, Vice President of Housing Policy; Vice President of Capital Markets and Technology David Cardwell; Vice President of Property Management Jeanne Delgado; Vice President of Communications Kim Duty; Vice President of Environment Eileen Lee; Tax Advisor Howard Menell; Vice President of Building Codes Ron Nickson; Chief Economist Mark Obrinsky; and Director of Property Operations Betsy Feigin Befus.