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 LOS ANGELES, Aug. 11 /PRNewswire/ -- While the debate over the

recently adopted Clinton administration budget was focused on deficit reduction and increased taxes, several elements of the Budget Act will benefit the depressed real estate industry.
 According to Chris H. Carlson, tax partner in the Los Angeles Real Estate Services Group of Deloitte & Touche, the principal beneficiaries are those who can utilize the newly expanded "passive loss rules." "Through 1986, it was possible for real estate investors to deduct depreciation and other real estate operating expenses on real estate investments from ordinary income. This ability was changed by the 1986 tax law which mandated that real estate expenses could only be deducted on a dollar-for-dollar basis from passive investment income," Carlson said. "There was a special rule permitting the deduction of up to $25,000 of income losses from rental real estate activities if the taxpayer actively "participated" in them. This participation was defined in a variety of ways including involvement with management decision making and at least a 10 percent interest in the property. Additionally, the $25,000 is phased out for taxpayers with incomes between $100,000 and $150,000."
 Under the new Act, real estate professionals, who have direct involvement in the development or management of real estate, will no longer be subject to the passive loss limitations and may begin deducting net real estate losses from ordinary income, Carlson said. "There are a variety of 'tests' which must be met by individuals in order to qualify for eligibility," he continued. "These include the need to demonstrate that more than half of the taxpayers time (at least 750 hours annually is spent working such real estate) must be spent on real estate in which he or she 'materially' participates. Closely held C Corporations can also qualify under the new rules if more than 50 percent of its gross receipts are derived from real estate."
 Deloitte & Touche believes that the Act will change the way real estate is owned in the future. "Because of the hurdles which continue to be placed in the path of real estate limited partnerships, we see more ownership interests passing to S Corporations which will have a much easier time meeting the stipulated test of participation," Carlson noted. The new passive loss provisions become effective Dec. 31, 1993.
 In another important boost for the commercial real estate market, the new Act will facilitate greater investment by pension funds and other tax exempt entities, by modifying certain unrelated business taxable income (UBTI) rules. "Of particular relevance is the relaxation on limitations on investments in REITS by pension funds," Carlson emphasized. "The Act specifically provides that a pension trust will not be treated as a single individual for purposes of the `five-or- fewer-rule' and stipulates that a REIT is not subject to the personal holding company tax on its undistributed income. Although these issues may seem arcane to non-tax professionals, they're most important in the current environment where real estate financing is at a premium. There was a time not long ago when pension trusts were projected to invest 10 percent of their total assets in real estate. This never happened. Today less than 3 percent of total pension trust assets are in real estate. However, the popularity of REITS is bringing them back into the market and this new provision should accelerate the process," he continued. The pension fund investment provision is effective beginning Jan. 1, 1994.
 "The final major item in the Clinton budget which will have a positive effect on real estate owners and developers, relates to real property indebtedness," Carlson said. "The Act will make it possible for those who restructure certain debt obligations, to exclude from gross income the taxable income created from the discharge of a portion of the obligation. Again there are some very specific criteria that must be met but, in the past, only those who went bankrupt or were insolvent, could take advantage of this exclusion. We believe this will be helpful to many real estate companies as they contemplate restructuring their assets." This provision is retroactive to debt discharges occurring on or after Jan. 1, 1993.
 "There is one negative aspect to the Clinton budget in terms of non- residential real estate," Carlson commented. "The depreciation period has been extended from 31.5 to 39 years. This was done to offset the revenues being lost by liberalizing the passive loss rules. This extended depreciation period will not help the commercial construction industry which is already almost comatose, particularly in Southern California."
 A complete and comprehensive analysis of the new Budget Act can be obtained from Deloitte & Touche's Real Estate Services Group in Century City.
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 /CONTACT: Clive Hoffman Associates, 213-965-7171, for Deloitte & Touche/

CO: Deloitte & Touche ST: California IN: FIN SU:

EH-AF -- LA024R -- 1829 08/11/93 16:26 EDT
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Date:Aug 11, 1993

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