Tax changes may stimulate residential market.
The Budget Reconciliation Act of 1993, passed by Congress and signed into law by President Clinton in August, has provisions that may correct tax inequities for real estate created by the Tax Reform Act of 1986. Of great interest to both real estate professionals and consumers are the provisions concerning the permanent extensions of mortgage revenue bonds and mortgage credit certificates; passive loss tax reform; and the removal of disincentives to workouts of troubled commercial real estate loans. For owners and developers in New York City, the amended J-51 law has captured center stage.
As a Licensed Real Estate Broker, and Registered Mortgage Broker with the New York State Banking Department, I'm hopeful that the tax law changes will stimulate the residential markets through housing affordability incentives, and by maintaining low interest rates.
This is clearly the best time to buy or refinance because the interest rates are the lowest we've seen in over twenty years. Low interest rates are attractive, but the application process is not. First-time buyers, and those looking to refinance are finding the application process significantly more complicated and time consuming than expected.
You may have an excellent personal portfolio, which the lender will certainly take into consideration, but you will also need to furnish a comprehensive profile of the building, which may include detailed information concerning asbestos abatement, the owner to sublet ratio, the number of unsold shares, the engineers survey, and the status of the reserve fund. A Registered Mortgage Broker, who is also an Accredited Property Manager, is best-equipped to prepare the package and speed it through the maze.
Over the past two years, we have experienced an increased demand for our mortgage brokerage services. Most of our referrals come from cooperative and condominium owners and board members currently utilizing our property management services. These individuals are very successful investors who want to protect and further their multi-million dollar investments. They require accurate financial statements and immediate responsiveness to their broad-based concerns. They know good management can make an investment a seller.
Real estate owners are very interested in the controversial "passive loss" reform. For the first time since 1987, some owners who meet specific requirements, may deduct rental real estate losses against their regular income. For those owners, real estate agents and brokers, builders, renovators and managers who qualify, this may be a very important change, but qualifying is the key, and that may require very careful planning.
The news looks good for low and middle-income renters, buyers and investors who stand to benefit from mortgage revenue bonds for first-time home buyers, as well as the permanent authorization of the low-income housing tax credit for rehabilitation of rental properties.
We are further encouraged by the new law's provisions indicating commercial market reforms. Recently, the commercial market has been showing signs of recovery, and removing some of the measures imposed in 1986 may have a continued positive impact on growth. As a result of removing some technical obstacles contained in the 1986 policy, pension funds will be encouraged to buy stock in real estate investment trusts (REITS), which could positively impact the value of both residential and commercial properties.
We'll be seeing increases in taxes on personal and corporate income, but the capital gains taxes on real estate will remain fixed at 28 percent. That makes a real estate investment even more attractive.
New York City dwellers will benefit from Local Law 49, which expands and extends the J-51 real estate tax exemption/abatement program to cover eligible conversions, alterations and improvements completed by Dec.31, 1999. The liberalization of the elligibility provisions for cooperatives and condominiums that complete qualifying work more than three years after their initial closing date, is a significant reform that will further the preservation of multi-family housing, and generate jobs for workers who construct major capital improvements.
Surprisingly, even with the tough economic times, many owners are still not taking advantage of this tax abatement/exemption program to help them pay for needed capital improvements to their buildings. Owners, it would seem, either don't know the specific requirements of the law, or don't have a lot of time to devote exclusively to the complicated application process.
Working with an experienced managing agent can make all the difference in facilitating the apllication process and taking full advantage of the J-51 program. We begin by investigating the property to find and correct any existing violations which may be costing the owners plenty in fines, and also holding up approval of the application.
We have found that Department of Building violations and Environmental Control Board violations ("B or C' violations), are a frequent cause for the delay in approving an application. Uncovering and correcting violations is job one, but that's only the beginning. We continue to monitor water, sewer and real estate taxes to assure that everything is paid up-to-date.
Boards have also come to realize that many dwellings converted in the 70's and 80's had cosmetic, rather than structural work performed to lure prospective buyers. In the 90's, many boards have been hit with the challenge of maintaining and improving what may be an older, deteriorating structure and for these owners, the new law may be quite beneficial. Eligibility, for a co-op or condo that was more than three years beyond its initial closing date, previously depended upon the completion of a system-wide improvement. Under the new law, any individual improvement approved by HPD is eligible.
Unfortunately the new law does not seem to have reduced the amount of bureaucratic red tape and paperwork you have to deal with, which is why the services of a qualified managing agent are so important. We have experienced personnel who work closely with your J51 attorney to track the entire process and manage it to successful completion.
Major capital improvements will undoubtedly continue to demand careful planning and oversight even as the economic forecast improves. Owners are sure to face difficult choices about which improvements take precedence over others to maintain the integrity of the investment.
We have successfully completed the installation of compactor systems in all Saparn-managed buildings and are helping our boards perform a wide range of improvements. Major renovations, such as the installation of new boiler systems, or the reconstruction of a roof, can make, or break a building depending on how thoroughly they are planned, assessed, and managed. Our track record of repeat contract renewals is proof of our expertise in this area.
While we're encouraged by the key real estate, provisions in The Budget Reconciliation Act of 1993, and the changes in New York City's J-51 law, we advises owners and board members to learn as much as possible about the new legislation from competent professional sources.
There is a significant competitive advantage to be gained by consulting an experienced real estate and property management specialist concerning these laws but for personal tax advice, we further recommend that you consult a professional tax or legal advisor who can address the new laws in terms of what they mean to your business or personal tax situation.
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|Title Annotation:||Residential Properties|
|Publication:||Real Estate Weekly|
|Date:||Nov 17, 1993|
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