Tax policy.

Federal tax policy should reflect the economic nature of investments in the financing of real estate and discourage laws causing an outflow of capital from real estate to other investments or distortions in the flow of capital to selective real estate sectors.

Tax Reform

NAA/NMHC Position: NAA/NMHC believe it is premature to adopt a position on the general subject of tax reform until actual consideration is underway and the objectives, scope and policy content can be determined. As a threshold matter, NAA/NMHC believe that any serious effort at meaningful tax reform must embrace a thorough review of the numerous provisions of the tax laws that implement and effectuate an unbalanced national housing policy and generally discriminate against multifamily housing; however, there is already evidence that these fundamental policy issues will be excluded from the exercise. The negative experiences of the apartment industry as a result of earlier tax reform efforts, most notably the Tax Reform Act of 1986 and enactment of depreciation recapture in 1997, suggest the exercise of caution during this formative period.

Background: Reform of the federal tax code will be one of the president's highest domestic priorities in his second term. The president has provided no timetable or policy direction and neither has the U.S. Treasury Department. The president has appointed a bipartisan tax reform commission to examine the issues and make specific recommendations for legislative and administrative action in 2005. Congressional leaders have adopted a "wait-and-see" approach to tax reform, pending more definitive guidance from the administration.

Action Requested: NAA/NMHC urge Congress to undertake tax reform initiatives carefully. Efforts to reform the tax laws should not be exploited as an opportunity, or provide an excuse, for Congress to increase the tax burdens on, or otherwise disadvantage, owners and renters of multifamily housing relative to other real estate and other asset classes.

Tax Cut Extensions

NAA/NMHC Position: NAA/NMHC support extension of several tax cuts previously passed by Congress and scheduled to expire.

Background: In the past three years, Congress has passed several major tax bills that included temporary tax cuts. The 2001 Economic Growth and Tax Relief Act (P.L. 107-16) reduced marginal tax rates, reduced the marriage penalty tax and reduced and then eliminated the estate tax. The 2003 Jobs and Growth Tax Relief Act (P.L. 108-27) accelerated individual income tax rates and reduced the tax on individual long-term capital gains and dividends to 15 percent.

In 2004, Congress extended many of the individual tax cuts through 2010 in the Working Families Tax Relief Act of 2004 (P.L. 108-311). However, many of the business-related tax cuts--specifically, reduced capital gains rates and taxation of dividend income at the capital gains rate--are scheduled to expire in 2008.

Action Requested: Congress should extend the tax reductions for those items that are necessary to avoid disruptions to the economy.

Capital Gains

NAA/NMHC Position: NAA/NMHC strongly support efforts to reduce the capital gains tax on older properties and to repeal the 25 percent depreciation recapture rule established in 1997.

Background: In 1997, when Congress reduced the maximum tax rate on long-term capital gains to 20 percent (for assets held more than 12 months), it imposed a 25 percent depreciation recapture rate on the portion of the gain assigned to the depreciable portion of a property. In 2003, the capital gains tax rate was further reduced to 15 percent (through 2008), but the depreciation recapture rate was left unchanged.

Because of the tax bill the sale would generate, the recapture rate discourages owners of older properties in need of modernization from selling them to new investors willing to invest the necessary capital in them. Imposing such a high depreciation recapture tax on apartment properties that have been depreciated from original cost fails to recognize the unique nature of commercial real estate property. It also discriminates against real estate in favor of other asset classes.

In 1999, Congress approved a tax bill that reduced capital gains and the depreciation recapture rate, but the measure was vetoed. More recently, in January 2004, the U.S. Treasury Department recommended simplification of the calculation of capital gains depreciation recapture on certain types of assets, including real estate, by eliminating the special 25 percent rate and replacing it with a new "blended" rate based on a combination of ordinary income and capital gains tax rates.

Action Requested: NAA/NMHC urge Congress to rescind the onerous and unnecessary depreciation recapture rule.

Exit Tax

NAA/NMHC Position: NAA/NMHC support the elimination of current tax law provisions that discourage owners of older properties from selling those properties. The so-called "exit taxes" discourage the transfer of these properties to owners who can modernize them and preserve them as affordable housing stock.

Background: Before 1986, the tax code encouraged limited partner investors to provide equity to apartment properties in exchange for tax savings. The Tax Reform Act of 1986 removed the ability of most investors to deduct losses generated by their properties from otherwise taxable income, which greatly reduced investors' economic interest in apartments.

Under the current tax laws, when owners/investors sell a property, they must pay capital gains tax and depreciation recapture taxes on the gain. Many properties cannot generate a high enough sales price to cover the "exit taxes." This puts properties with lesser economic value at risk of deterioration because the owners have no incentive to invest additional funds in a property with little or no cash-flow. As a result, many owners simply opt to hold onto the properties until their death, at which point no taxes will be assessed on the depreciated gain (and the possible capital gain above that) because the property's basis will be "stepped up" at death to current market value.

In 2003, the Congressionally chartered Millennial Housing Commission recommended Congress pass "exit tax relief" for owners who transfer affordable housing properties to entities that agree to preserve the properties and keep them affordable. Legislation based on this recommendation was introduced in both chambers of Congress in 2004, but it failed to pass before Congress adjourned.

Action Requested: NAA/NMHC urge Congress to support the broadest and most administratively efficient relief from the "exit tax" problem in the belief that all apartment owners, whether federally assisted or not, should be eligible for such relief in order to attract new capital to properties for renovation and modernization.

Federal Estate Tax

NAA/NMHC Position: NAA/NMHC strongly support extension of the federal estate tax laws that will be in effect in 2009 to the year 2010 and beyond.

Background: In 2001, Congress passed legislation to eliminate the estate tax. It gradually reduces the tax rate and increases the size of estates excluded from taxation during 2002 to 2009. Then, for nine months in 2010, it fully repeals the estate tax. But in October 2010, the law reverts back to the higher rates and smaller exclusions in place in 2001.

In addition to repealing the estate tax, the law also repeals "stepped-up" basis. Stepped-up basis determines whether heirs of depreciable properties pay capital gains taxes based on the fair market value of a property when they inherited it or on the higher accounting basis (the original purchase price less any depreciation taken by the donor.)

Because the law repeals both the estate tax and the stepped-up basis provision, commercial property owners are better off retaining the estate tax law as it will exist in 2009: (1) assets are stepped up to fair market value at time of the donor's death; (2) the first $3.5 million of an estate is excluded from taxation; (3) for assets beyond the $3.5 million exclusion, a maximum 45 percent tax rate is applied to the net fair market value (value minus debt); and (4) heirs may redepreciate the property granted them using fair market value (stepped-up basis). The U.S. House of Representatives has repeatedly passed legislation to make full repeal of federal estate tax permanent, but the Senate has not acted. Another attempt is expected in 2005.

Action Requested: NAA/NMHC urge Congress to extend the estate tax provisions scheduled to be in place in 2009 rather than fully repeal the estate tax.

Environmental Clean-Up

NAA/NMHC Position: NAA/NMHC believe Congress and the U.S. Treasury Department should allow immediate expensing of environmental clean-up costs for tax purposes.

Background: A significant portion of U.S. land is contaminated with environmental hazards that will have to be cleaned before the land can be put into productive use. These hazards include asbestos, leaking underground storage tanks, groundwater contaminants, lead-based paint, airborne toxicities and radon. Whether these sites are cleaned depends on the economics of the situation, which, in turn, depends on federal tax treatment of those costs.

If taxpayers are forced to amortize the costs over the future life of the property instead of deducting them immediately, many clean-ups become cost prohibitive. Present tax law on environmental clean-up is unclear. Congress has previously passed legislation allowing immediate deduction of certain costs incurred when remediating brownfields, and extended the provision until Dec. 31, 2005. But that legislation applies only to brownfields.

Some tax experts argue that the costs should be matched against future revenue and thus capitalized. Other experts argue that the costs are similar to those for repairs of equipment and thus should be an immediate expense. NAA/NMHC are working with Congress and the U.S. Treasury Department officials to provide a sound basis for immediate expensing of these costs.

Action Requested: NAA/NMHC urge Congress to allow immediate expensing of environmental clean-up costs for tax purposes. We also urge Congress to make the current brownfields expensing law permanent and to expand it to include petroleum products.

Depreciation

NAA/NMHC Position: NAA/NMHC support further studies in conjunction with Congress and the U.S. Treasury Department to ascertain a more accurate estimate of the composite useful life of an apartment property.

Background: Current tax law allows apartment properties to be depreciated over a 27.5-year period, but a 2000 study by NAA/NMHC suggests that may be too long. Our research showed the tree useful life of an apartment property is closer to 20-25 years.

In spring 2001, the U.S. Treasury, Department released its initial report on depreciation and called for further study.

Action Requested: The U.S. Treasury Department should reinvigorate its study of useful depreciation lives so that tax law will reflect economic reality.