Duration of Tax Cuts
NAA/NMHC Position NAA/NMHC support extension of several tax cuts passed by Congress in 2001 and 2003 and scheduled to expire in 2004, 2005 and 2006.
Background The Economic Growth and Tax Relief Act of 2001 reduced marginal tax rates, reduced the marriage penalty tax, and reduced and then eliminated the estate tax. The Jobs and Growth Tax Relief Act of 2003 accelerated the individual income tax rates, and reduced the tax on individual long-term capital gains and dividends to 15 percent. These and other provisions, including many important for working families, are scheduled to expire, or "sunset," at various times over the next several years.
Action Requested Congress should extend the tax reductions for those items that are necessary to avoid disruptions to the economy and provide certainty and predictability for working families.
NAA/NMHC Position NAA/NMHC strongly support efforts to reduce the capital gains tax on older properties and repeal the depreciation recapture role established in 1997.
Background In 1997, when the maximum tax rate on capital gains was reduced to 20 percent for assets held more than 12 months, a depreciation recapture rate of 25 percent was imposed on the portion of the gain that is assigned to the depreciable portion of the property. In 2003, the capital gains tax rate was reduced to 15 percent (through 2008), but the depreciation recapture rate was left unchanged. As a result, the recapture rate remains a significant deterrent that discourages owners of older properties from selling those properties to new investors who can commit vital capital to modernization.
By imposing a higher tax rate for apartment properties that have been depreciated from original cost, the present requirement of depreciation recapture, particularly at such a high rate, fails to recognize the unique nature of commercial real estate property and discriminates against real estate in comparison to other asset classes. The depreciation recapture rate above the rate of capital gains tax should be repealed.
Recent Activity In 1999, Congress approved tax legislation that coupled a reduction in the capital gains tax rate with a reduction in the depreciation recapture rate. Unfortunately, this legislation was vetoed by the president. In January 2004, the Treasury Department indicated it would seek 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 strongly favor and will advocate for tax legislation to rescind the onerous and unnecessary depreciation recapture rule.
NAA/NMHC Position As stated above, NAA/NMHC support elimination of provisions in the present tax law that discourage owners of older properties from selling those properties so--called "exit taxes"--to new owners who can commit vital capital to modernization.
Background Prior to 1986, the tax code provided incentives to encourage limited partner investors to provide equity to multifamily 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. The investors' economic interest in the property was greatly reduced. Under the current tax laws, a transfer of property' triggers capital gains tax and depreciation recapture taxes.
As a result, investors/owners of the property are reluctant or unwilling to transfer the property unless the sale proceeds will cover taxes due on sale. While a few multifamily properties can generate a high enough purchase price based on the property's value to reimburse investors for such "exit" taxes, many more properties cannot. The result is that properties with lesser economic value are at risk of deterioration as the investors have no incentive to invest funds in a property that has little or no cash flow and often generates phantom income for the investors. Often, owners are holding on to the properties until their death at which point no taxes will be collected on the depreciated gain (and the possible capital gain above that) because of the step up in basis at death.
Recent Activity The Millennial Housing Commission, created by Congress to study ,affordable housing issues, recommended the creation of a "new tool" to encourage the transfer of affordable housing properties from owners to entities that agree to preserve the properties and keep them affordable. "Exit tax relief" legislation patterned on this recommendation was introduced in the House of Representatives to address the problem of owners who are hesitant to sell federally assisted housing (e.g., project based Section 8, Section 236, Section 221 (d)(3) or Low Income Housing Tax Credits) to preservation purchasers because of the capital gains tax burden they would face upon the sale.
Action Requested NAA/NMHC support the broadest and most administratively efficient relief from the "exit tax" problem in the belief that all owners of multifamily housing, whether federally assisted or not, should be eligible for such relief in order to attract new capital to multifamily 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 significantly eased the burden of estate taxes to the point where in 2009 the amount subject to tax is greatly reduced and the rate of tax is lowered to 45 percent. Full repeal, including repeal of "stepped-up" basis, then takes place in 2010 for nine months, but then the changes enacted in 2001 are eliminated and the tax law in place in early 2001 is then reinstated.
Recent Activity In 2003, Congress attempted to make full repeal of the law permanent after Sept. 30, 2010. The measure passed in the House but did not attain the 60 votes necessary for passage in the Senate. An attempt to make full repeal permanent is expected to occur in 2004.
Action Requested NAA/NMHC urge Congress to extend the provisions scheduled to be in place in 2009 rather than fully repeal the estate tax.
NAA/NMHC Position NAA/NMHC believe Congress and the Treasury should allow expensing of environmental clean-up costs for tax purposes.
Background Whether it relates to asbestos, leaking underground storage tanks, groundwater contamination, lead paint, airborne toxicities or radon, the cost of environmental clean up will be in the hundreds of billions of dollars. Federal tax treat merit of the costs incurred will have a major impact on the economics of multifamily housing. Taxpayers should be able to deduct these costs on their tax returns immediately, rather than being forced to amortize the cost over the future life of the property. Present tax law on environmental clean up is unclear. Sonic tax experts argue that the costs should be matched against future revenue and thus capitalized. Other experts argue, just as strongly, that the costs are similar to those for routine repairs of equipment and thus should be an immediate expense.
Recent Activity NAA/NMHC are working with Congress and officials at the U.S. Treasury Department to provide a sound basis for immediate expensing of these costs. Brownfields clean up legislation that allows certain clean-up costs to be expensed has been helpful.
Action Requested Congress adjourned last year without renewing the expiring provisions of current law that allow owners to immediately expense certain costs associated with remediating brownfields. As a result, Congress will have to revisit the issue in early 2004. NAA/NMHC urge Congress to make permanent the incentives, which expired on Dec. 31, 2003, and to broaden the coverage, to include petroleum products, asbestos, pesticides, radon and lead based paint remediation and removal.
NAA/NMHC Position NAA/NMHC support further studies in conjunction with Congress and the Department of Treasury to ascertain a more accurate estimate of the composite useful life of an apartment property.
Background The present law composite depreciation life of 27.5 years for apartments may be too long. Initial studies by NAA/NMHC in 2000 showed that a true useful life of all apartment property is probably closer to 20 to 25 years.
Recent Activity The U.S. Department of Treasury released its initial report on depreciation in the spring of 2001. Further study is called for. The economic stimulus package that failed to receive final Congressional approval in late 2001 included a provision that would allow tip to 30 percent expensing of new investment in fixed assets with useful lives of 20 years or less. Most apartment assets would not be eligible under that expensing bonus provision.
Action Requested The Department of the Treasury should reinvigorate its study of useful depreciation lives so tax law will reflect economic reality.
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|Title Annotation:||NAA Capital Conference|
|Date:||Mar 1, 2004|
|Previous Article:||Finance and housing.|