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New law brings tax opportunities for RE pros. (Insiders Outlook).

During this past March. Congress passed an economic stimulus package called the Job Creation and Worker Assistance Act of 2002 (the "2002 Tax Act"). The cornerstone of this new tax act is the allowance for an additional first year 30% bonus depreciation deduction on the purchase of new assets, including real estate.

The bonus depreciation is such a powerful tax saver, especially in the context of real estate investment, that taxpayers will enjoy $96.9 billion of tax savings and refunds over the next three years. Given the relatively short window of opportunity (generally 2002 to 2004), real estate participants, including owners, landlords, tenants, brokers, investment bankers and speculators must seize the day (Carpe Diem), and immediately set into motion a plan of action to maximize their rightful share of this massive tax giveaway.

The bonus depreciation applies to most leasehold improvements to non-residential realty, and to certain types of new construction. The qualifying leasehold improvements generally include interior improvement to commercial tenants space in buildings that are at least three years old. New construction, including major renovations, will qualify for bonus depreciation if the realty, or portion thereof, qualifies for the 5-, 7- or 15-year tax lives. This category includes land improvements such as surface outdoor parking lots, fences, sidewalks, landscaping, and all building systems qualifying as 5- or 7- year property under cost segregation studies.

The additional first-year bonus depreciation deduction equals 30% of the cost of the property. The remaining 70% of the property is depreciated according to the regular tax rules. Given that real estate acquisitions are financed up to 100% of value, and that real estate is afforded special treatment under the tax code with respect to debt-financed deductions, an exceptional opportunity exists in creating extraordinary tax write-offs with minimal cash investments. Taxpayers with significant passive income will immediately enjoy the benefits of these new tax write-offs.

To qualify for the bonus depreciation, the real estate must be acquired prior to sept 11, 2004, and must be placed-in-service by Dec. 31, 2004 (Dec. 31, 2005 for certain major improvements). Real estate located in the Wall Street area will be subject to more generous write-offs and extended placed-in-service dates.

The new tax act will have a vast impact on the real estate industry. Among opportunities for real estate participants:

* Owners of Self-Used Realty -- Until now, businesses generally preferred renting real estate over ownership for various tax and financial reasons. Profitable businesses can now recoup current and prior period tax payments (special 5- year lookback for 2002) by buying real estate which qualifies for the 30% bonus depreciation or by investing in new leasehold improvements.

* Landlord and Tenants -- Ownership of the tenant improvement has always been problematic from a tax viewpoint since the owner of the leasehold was typically stuck with non-cash taxable income during the lease term. The bonus depreciation will mitigate this issue, and will change the dynamics in the landlord/tenant lease negotiation.

* Builders and Contractors -- 2004 and 2005 may become especially busy years for the construction industry as owners and tenants will be pressured into meeting the restrictive placed-in-service guidelines under these new tax rules.

* Brokers -- The real estate buy vs. rent decision is oftentimes driven by tax consequences. Savvy brokers will push their clients into action by playing up these new limited-time tax benefits. In many cases, the bonus depreciation will substantially reduce the cost of ownership, increase demand, and force prices to rise, thereby providing excellent selling points for the brokers.

* Short-term Players -- Real estate investment bankers, opportunity fund managers and real estate speculators, armed with their present value models and ROI analysis, will identify new market opportunities.

* Tax professionals -- Cost segregation promoters will rerun existing benefit models, and will incorporate the new tax rules into their marketing presentations. Creative tax advisors will develop exit strategies that convert bonus depreciation to capital gain recapture income.
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Article Details
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Author:Tipograph, Neil H.
Publication:Real Estate Weekly
Article Type:Brief Article
Geographic Code:1USA
Date:May 29, 2002
Words:644
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