Ccim Commercial Real Estate

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					 Federal Tax Policies Affecting
Commercial Real Estate Brokers

        Updated August 2010
                                     Table of Contents
Table of Contents ................................................................................. 2
Introduction ......................................................................................... 3
Capital Gains ....................................................................................... 3
1031 Like Kind Exchange ....................................................................... 4
Estate Tax ........................................................................................... 4
Depreciation ........................................................................................ 5
  Tenant Improvements ........................................................................ 6

Passive Loss ........................................................................................ 7
Real Estate Mortgage Investment Conduit (REMIC) ................................... 8
Energy Efficiency Tax Credit ................................................................. 10
Brownfields Deduction (Currently Expired) ............................................. 11
Appendix I – Federal Taxation Reference Chart for CCIMs ..Error! Bookmark
not defined.




                                                                                                      2
Introduction
A tax code that encourages investment is beneficial to CCIMs, their clients, and the health
of our nation’s economy. The CCIM Institute Legislative Department monitors legislation in
Congress, as well as regulatory action by the Treasury Department. The federal tax code is
constantly changing and growing more complicated, so CCIMs should work closely with a
tax professional to make sure that they are taking full advantage of the many credits and
deductions available to them.

For CCIMs who are interested in how the current set of tax policies came to be, as well as if,
when, and how those policies may change, the Legislative Department Staff has prepared
this primer. Questions about the specific impact that each statute or regulation could have
on you or your company’s finances should be directed to you tax professional.



Capital Gains
The appropriate level of taxation for capital gains (the amount realized when property held
for investment is sold) has been a subject of tax policy debate throughout the history of the
income tax. For at least 50 years (with the exception of the period from 1986 – 1990),
capital gains have been taxed at rates well below the maximum tax rate for ordinary
income. During the past 25 years that rate has ranged from a high of 49% to the current
rate of 15% (this rate is set to expire on December 31, 2010). Since 1997, depreciation
allowances taken in prior years are ―recaptured‖ (or taken back into income‖) and taxed at
25% when investment real estate is sold. Prior to 1997, depreciation recapture amounts
were taxed at the same rate as capital gains. Capital losses are deductible in full against
capital gains. In addition, individuals may deduct up to $3,000 of capital losses against
ordinary income in each year, with any remaining excess losses being carried forward to
future tax years.

Position Statement
CCIM Institute believes that it is in our nation’s best interest for Congress to encourage real
estate investment in the United States by creating a tax system that recognizes inflation
and creates a meaningful differential between the tax rates for ordinary income and those
for capital gains. The CCIM Institute supports a level playing field for those who choose to
invest in real estate and thus opposes rates for depreciation recapture that are higher than
the capital gains rate. (see also Depreciation)

Other Sources
       The Internal Revenue Service, U.S. Department of the Treasury
       http://www.irs.gov/taxtopics/tc409.html

       National Association of REALTORS® Issue Summary
       http://www.realtor.org/fedistrk.nsf/0/86651a733e825bdd8525663c00586cb9?OpenD
       ocument




                                                                                              3
1031 Like Kind Exchange
Section 1031 of the Internal Revenue Code allows investors to defer capital gains taxes on
the exchange of like-kind properties. 1031, or tax-deferred, exchanges hold great
advantages for both investors and CCIMs. An exchange is defined as a reciprocal transfer of
real property that has certain tax advantages over a sale. ―Like-kind‖ is defined as any real
property for any other real property if said property(ies) is held for productive use in trade
or business or for investment.

A qualified intermediary (QI) facilitates the tax-deferred exchange by holding the net sales
proceeds from the seller/exchangers relinquished property in an account that prevents
constructive receipt by the seller/exchanger. The QI then releases the funds upon
settlement of the substitute property by the seller/exchangers. The use of a QI when
entering into a tax-deferred exchange is mandatory when the QI safe harbor is elected. The
QI cannot be a related party to the seller/exchanger in any way that would allow the
seller/exchanger to influence the QI to release the funds prematurely.

Upon closing the sale of a property, there is a 45-day period in which an investor must
identify properties they would like to exchange into and a 180 day period (which includes
the 45 days) in which to close on the identified property. The new property price has to be
at least equal to the net sales price of the old property. If not, the investor pays tax on any
cash, boot, or net mortgage relief received.

CCIM Institute Position Statement
The 1031 Like-Kind Exchange is an integral part of a CCIM’s transaction portfolio.
Therefore, the CCIM Institute opposes any federal regulatory or legislative action that
jeopardizes the ability of investors to partake in this tax-deferred real property transaction.
The CCIM Institute opposes any regulation or legislation that would render the transaction
more difficult and/or less appealing to investors.

Other Sources

       The Internal Revenue Service, U.S. Department of the Treasury
       http://www.irs.gov/businesses/small/industries/article/0,,id=98491,00.html

       National Association of REALTORS® Field Guide
       http://www.realtor.org/libweb.nsf/pages/fg408



Estate Tax
The Death Tax (a.k.a. the Estate Tax) has long been criticized for forcing dissolution of
family-held businesses and estates (an after-tax accumulation of assets on which income
tax has already been paid at least once). These hardships occur after the death of one
generation of ownership because of its confiscatory rates as well as the questionable
―double jeopardy for taxation‖ to which it subjects these assets. Many family-held
businesses or estates have a large net worth but lack liquid assets necessary to pay the
Death Taxes and still remain held by the deceased heirs or beneficiaries, forcing break-ups



                                                                                                  4
of family-held businesses, commercial real estate portfolios, farms, ranches and timberland
holdings. Real estate is especially impacted as an investment venue or estate asset
category because of its nature as a non-liquid asset.

In 2001, legislation was adopted that gradually increased the estate tax exclusion from
$675,000 to $3 million and the reduced estate tax rates gradually to a maximum of 45%,
with a full repeal in 2010. As under prior law, the basis of assets received between 2001
and 2009 is "stepped up" to fair market value as of the time of death. During the one-year
estate tax repeal in 2010, the estate will not be taxed, but the basis of assets that heirs
receive will be "carried over" so that the heir's basis is the same as the basis of the previous
owner. Absent further legislation, the estate tax rules will revert to their pre-2001 status as
of January 1, 2011. There have been several legislative pushes since 2001 to permanently
repeal the estate tax, or at least reform the rules that will apply after January 1, 2011.

CCIM Position Statement
The Death Tax (also known as the Estate Tax) at the federal level is a major obstacle for
CCIMs and their client base who are small business owners and who own portfolios of
accumulated after-tax income in the form of assets commonly known as an ―Estate‖ and
desire to pass on their businesses or their assets to their designated heirs, usually family
members and charitable beneficiaries. This problem is aggravated when heirs or
beneficiaries do not have sufficient liquid assets to pay the Death Tax/Estate Tax. In the
case of non-liquid assets such as real estate or small businesses, the Death Tax usually
forces heirs or other beneficiaries to sell such assets just to pay the Death Tax. CCIM
Institute supports the eventual phase-out or outright repeal of the Death Tax, since this
creates unreasonable hardships on families and is regressive towards capital formation and
retention for business expansion and job creation. The CCIM Institute would also support
estate tax reform measures that would permit stepped-up basis, tax all assets in an estate
at the same rate (i.e., rates would not depend on the type of asset), exclude an amount
comparable to the $5 million exclusion that would be in effect in 2010, provide estate tax
rates lower than or equal to the individual tax rates of the income tax structure and index
the estate tax exclusion amounts.

Other Sources

       The Internal Revenue Service, U.S. Department of the Treasury
       http://www.irs.gov/businesses/small/article/0,,id=98968,00.html#estate

       National Association of REALTORS® Issue Summary
       http://www.realtor.org/fedistrk.nsf/0/3c69f136e288e44b8525663c0061e91d?OpenD
       ocument



Depreciation
The Economic Recovery Tax Act of 1981 created a depreciable life of 15 years for all real
property placed in service after December 31, 1980. For property placed in service after
March 15, 1984, the depreciable life was extended to 18 years, and for property placed in
service after May 8, 1985, to 19 years. Depreciation rules changed again when the Tax
Reform Act of 1986 was enacted. Depreciable life of a non-residential property changed to
31.5 years, and the depreciable life of a residential property changed to 27.5 years.

Yet again, the enactment of the 1993 Tax Act changed depreciable life for a nonresidential
building to 39 years (residential property remained at 27.5 years). The 39-year depreciable


                                                                                               5
life applies to properties placed in service on or after May 13, 1993. The extension of the
depreciable life to 39 years was intended to be in return for favorable passive loss tax law
and other tax law changes in 1993. Unfortunately, the Internal Revenue Service (IRS) did
not interpret the 1993 law in such a way to be favorable to commercial real estate thereby
eliminating almost any benefit to the commercial real estate industry.

Position Statement
The current 39-year time frame does not accurately reflect the useful life of a building and
its components. The CCIM Institute supports depreciation reform for nonresidential and
residential real estate that secures a significantly shorter cost recovery period for
commercial real estate without adding complexity or creating artificial acceleration of
deductions and accurately reflects the economic life of the property. Furthermore:

1. Upon recognition of capital gain, taxpayers should be able to use sales costs basis to first
reduce the depreciation recapture portion of the gain;

2. Suspended losses first go to reduce depreciation recapture;

3. An installment sale as gain is recognized over a period of time, that a percentage of gain
from appreciation and depreciation recapture be used in reporting gain;

4. A partially tax deferred exchange, gain from appreciation and depreciation recapture
should be reported on an allocated percentage basis.

5. Any other proposed regulation that affects the reporting of capital gain by commercial,
industrial or investment real estate taxpayers be reported in the most advantageous
manner for the taxpayer; and

6. Any proposed regulation that clarifies or makes easier the calculation of depreciation
deductions under the ―modified accelerated cost recovery system‖ when property is
acquired in a like-kind exchange or as a result of an involuntary conversion shall be
reported in the most advantageous manner for the taxpayer.


Tenant Improvements
The real estate definition of tenant improvement is money or any other financial incentive to
a lessee, by the lessor, to cover, either partially or wholly, the cost of any structural
changes (items such as upgraded electrical equipment, cable, reconfigured interior space,
telecommunications equipment and technological updates) to a space in preparation for
occupancy by the lessee.

The Economic Recovery Tax Act of 1981 created a depreciable life of 15 years for all real
property placed in service after December 31, 1980. For property placed in service after
March 15, 1984, the depreciable life was extended to 18 years, and for property placed in
service after May 8, 1985, to 19 years. In 1986, the Tax Reform Act was enacted into law.
This changed depreciation rules considerably. It changed the depreciable life of a non-
residential property to 31.5 years, and the life of residential to a depreciable life of 27.5
years.

The cost for tenant improvements is amortized over the depreciable life of the
nonresidential building, not, as in prior laws, over the term of the lease. The current
depreciable life for a nonresidential building is 39 years, while the depreciable life of a


                                                                                                6
residential property is 27.5 years. This 39 year depreciation applies to properties placed in
service on or after May 13, 1993. In 2004, legislation was adopted that temporarily changed
the amortization period for certain leasehold improvements to 15 years, with any remaining
balance deductible at the end of the lease. This provision expired on December 31, 2005.

In another temporary provision enacted on March 9, 2002, landlords (or tenants – but not
both) were able to deduct 30% of the cost of leasehold improvements in the year they are
placed in service. This provision applied to improvements made between September 11,
2001 and September 11, 2004.

Position Statement
CCIM Institute is in support of legislation to decrease the length of depreciable lives for
tenant improvements to the length of the lease term. CCIM Institute supports legislative
language that would allow any remainder of tenant improvement costs left upon early
termination of the lease to be written off upon the termination of a lease, not over the
depreciable life of a structure.

Other Sources

       The Internal Revenue Service, U.S. Department of the Treasury
       http://www.irs.gov/businesses/small/article/0,,id=137026,00.html

       National Association of REALTORS® Issue Summary on Depreciation
       http://www.realtor.org/fedistrk.nsf/0/3197cdba53248b4a85256809005ab61c?OpenD
       ocument

       National Association of REALTORS® Issue Summary on Tennant Improvements
       http://www.realtor.org/fedistrk.nsf/0/29367cbe3de5a848852566db00560fc7?OpenD
       ocument



Passive Loss
The 1986 Tax Reform Act contained a provision known as passive loss limitation.
These rules limited the amount of deductions for losses from passive activities to the
amount of income those activities generate. Passive activities are defined as those in which
a taxpayer does not materially participate in any rental activity. Thus, rental activity was
deemed to be inherently passive even if rental activity is the principal business of the
taxpayer, or is an integral part of the taxpayer’s real estate business.
The act was originally intended to broaden the tax base, and to abolish many existing tax
shelters.

The Budget Reconciliation Act of 1993 included a passive loss tax law change. The intent of
the new passive loss tax law was to allow individuals whose primary business is real estate
to deduct rental property losses from their income. This was fair because other business
professionals were permitted to deduct business losses from income. The act stated that in
order to deduct passive losses from rental activity, an individual must be a material
participant in the real estate trade or business, and spend more than 750 hours and a
minimum of 50% of their time in various real estate activities.

The current problem lies with the final rules and interpretation of the legislation by the
Internal Revenue Service. The regulations released in February 1995 by the IRS were
unfavorable to the real estate industry. As written, these regulations still treated rental real


                                                                                                   7
estate activity differently than other real estate activity. Final rules on passive loss were
released in December 1995. These rules were an improvement to those released earlier in
the year, but there still exists a separation in the definition of rental real estate activity.

The intent of the new passive loss tax provision, which was released in December
1995, was to allow individuals whose primary business is real estate to deduct rental
property losses from income. Retroactively effective January 1, 1995, these regulations
state that a taxpayer that materially participates in rental activity does not necessarily have
to interpret this rental activity as passive. Thus, losses on this activity can be used to offset
nonpassive income.

Taxpayers must qualify in two ways. At least 750 hours must be spent in real estate
activities in which the taxpayer materially participates and half the time annually must be
spent in these real estate activities. Additionally, if the taxpayer works in the real estate
field, he or she must own at least 5% of the business in order for the time worked to count
(if the taxpayer is not 5% owner the entire year, the portion of the year that the taxpayer is
5% owner may be prorated for that time.)

Position Statement
The CCIM Institute believes that active or material participants in real estate should be
allowed to deduct all cash and non-cash rental losses against their other income and should
be afforded the same benefits that other businesses have within the tax code. As part of the
Budget Reconciliation Act of 1993, Congress qualified that real estate professionals who
spend at least 750 hours and half their time annually in real estate activities will be
permitted to use losses on rental real estate to offset any income.

CCIM Institute urges the IRS to revise passive tax loss regulations to mirror the original
intent of federal legislators in enacting a change made in 1993 to the passive loss tax law.

Other Sources

       The Internal Revenue Service, U.S. Department of the Treasury
       http://www.irs.gov/businesses/small/article/0,,id=146318,00.html




Real Estate Mortgage Investment Conduit (REMIC)
Real Estate Mortgage Investment Conduit (REMIC) is a tax vehicle created by Congress in
1986 to support the housing market and investment in real estate by making it simpler to
issue real estate backed securities. REMICs are essentially the vehicle by which loans are
grouped into securities. As of September 30th, 2003, the value of single family,
multifamily, and commercial –mortgage backed REMICs outstanding was over $1.2 trillion.

While the current volume of REMIC transactions reflects their important role in this market,
certain changes to the tax code will eliminate impediments and unleash even greater
potential. Of all outstanding securitized debt, roughly a quarter is attributable to
commercial loans. The securitization of commercial loans is viewed as unattractive to
borrowers because of the limitations the federal rules place on the loan once it is
securitized. Current rules that govern REMICs often prevent many common loan
modifications that facilitate loan administration and ensure repayment of investors. For
example, it is difficult for a mall, whose mortgage is held as part of a REMIC, to demolish a



                                                                                                  8
portion of the building to construct space for a new anchor store. Under current rules, for
any change to collateral, a property owner must obtain a tax opinion. If the opinion finds
that more than 10% of the collateral is modified, the renovation cannot go forward.

While REMICs have been instrumental in increasing the flow of capital to residential
properties, the rules governing loan modifications have had a dampening effect on the
securitization of commercial loans. Because securitization contributes to the efficiency of
and liquidity of the secondary market for mortgage loans, it is hoped that changing the
REMIC rules will lower the cost of commercial real estate borrowing and spur real estate
development and re-habilitation. In recent years, several bills have been introduced to
modernize REMIC rules.

Position Statement
CCIM Institute supports legislation that amends the REMIC rules to allow more common
modifications to property. The changes would allow for, among other things:

      Preparing space for tenants (Tenant expansions and building additions): Under the
       proposed change, tenant improvements would not be considered a significant
       modification. Under current rules, a tax opinion must be obtained before
       demolishing/tenant improvements begin. If the space comprises more than 10% of
       the REMIC collateral, the change could be denied.

      Special problems for retail space: Under the proposed change, landlords could more
       easily reconfigure space to accommodate large anchor tenants and their
       requirements that only specific types of tenants occupy adjoining space so that
       instances where space "goes dark" because lease agreements could not be met are
       minimized.

      Sale of adjoining parcels: The proposed change would allow the sale of adjacent
       property that does not have any economic value to the landlord. Under current rules
       a tax opinion is necessary to determine whether sale materially alters the collateral -
       -if it does, the sale would be blocked, even though the proceeds would be used to
       bolster reserves as required by the lender or pay down the loan.

      Addition of collateral to support building renovations and expansions: The proposed
       change would allow the posting of additional collateral in connection with the
       demolition or expansion of a property.

In amending the rules, modifications to a qualified mortgage would be allowed, provided:

          1. The final maturity date of the obligation may not be extended, unless the
             extension would not be a significant modification under applicable
             regulations;
          2. The outstanding principal balance of the obligation may not be increased
             other than by the capitalization of unpaid interest; and
          3. A release of real property collateral may not cause the obligation to be
             principally secured by an interest in real property, other than a permitted
             defeasance with government securities.




                                                                                              9
The alteration may not result in an instrument or property right that is not debt for federal
income tax purposes.

Other Sources

       The Internal Revenue Service, U.S. Department of the Treasury
       http://www.irs.gov/publications/p938/ar02.html

       National Association of REALTORS® Issue Summary
       http://www.realtor.org/fedistrk.nsf/0/5a5a49bf28b5922d85256e760075839d?OpenD
       ocument



Energy Efficiency Tax Credit
The economic factors of supply and demand of energy resources surround the current
debate of the nation’s energy crisis. Efforts to create legislation on energy production and
conservation were the focus of policymakers in the 109 th Congress. H.R. 6, the Energy
Policy Act of 2005, which the president signed H.R. 6 into law on August 8, 2005, included
the Energy Efficient Commercial Buildings Deduction. This provision allows a deduction for
energy efficient commercial buildings that reduce annual energy and power consumption by
50 percent compared to the American Society of Heating, Refrigerating, and Air
Conditioning Engineers (ASHRAE) standard. The deduction will equal the cost of energy
efficient property installed during construction, with a maximum deduction of $1.80 per
square foot of the building. Also, a partial deduction of 60 cents per square foot would be
provided for building subsystems.

Position Statement
The CCIM Institute supports the concept of conservation policies and the use of energy
efficient technology in building design and construction. However, we oppose mandatory
national standards for building energy conservation. Instead, CCIM Institute encourages
positive incentives for conservation activities such as energy tax credits and an increased
emphasis on energy efficient technology by the nation’s building industry.

In this growing economy, it is vital that consumers (both individual and business) have
access to reliable, reasonably priced energy. CCIM Institute encourages its members to
conserve energy and reduce demand in their facilities. We encourage voluntary participation
in programs such as EPA’s Building Program, Green Lights Program, and Energy Star
Program.

Other Sources

       The Internal Revenue Service, U.S. Department of the Treasury
       http://www.irs.gov/newsroom/article/0,,id=158395,00.html

       National Association of REALTORS® Issue Summary
       http://www.realtor.org/GAPublic.nsf/pages/retaxincentives




                                                                                              10
Historic Preservation Tax Incentives
Historic buildings are tangible links with the past. They help give a community a sense of
identity, stability and orientation. The Federal Historic Preservation Tax Incentives program
is one of the Federal government’s most successful and cost-effective community
revitalization programs. The Preservation Tax Incentives reward private investment in
rehabilitating historic properties such as offices, rental housing, and retail stores. Current
tax incentives for preservation, established by the Tax Reform Act of 1986 include:

      A tax credit equal to 20% of the amount spent on the certified rehabilitation of
       certified historic structures.
      A 10% tax credit for the rehabilitation of non-historic, non-residential buildings built
       before 1936.

A certified historic structure is a building that is listed individually in the National Register of
Historic Places —OR— a building that is located in a registered historic district and certified
by the National Park Service as contributing to the historic significance of that district. The
20% credit is available for properties rehabilitated for commercial, industrial, agricultural, or
rental residential purposes. A certified rehabilitation is a rehabilitation of a certified historic
structure that is approved by the NPS as being consistent with the historic character of the
property and, where applicable, the district in which it is located.

The 10% rehabilitation tax credit is available for the rehabilitation of non-historic buildings
placed in service before 1936, and applies only to buildings rehabilitated for non-residential
uses. Rental housing would thus not qualify. Hotels, however, would qualify. They are
considered to be in commercial use, not residential.

Other Sources

       National Park Service online brochure, Historic Preservation Tax Incentives
       http://www.cr.nps.gov/hps/tps/tax/brochure1.htm



Brownfields Deduction (Currently Expired)
Brownfields are defunct, derelict, or abandoned commercial or industrial sites, often tainted
by the presence or potential presence of hazardous substances, pollutants, or contaminants.

In August 1997, the Federal Brownfields Tax Incentive was created as part of the Taxpayer
Relief Act, permitting environmental cleanup costs associated with brownfields to be
deducted in the year the costs are incurred. This incentive was temporary, and the most
recent extension expired in 2005. As a result the full cost of cleanup once again must be
capitalized into the cost of the land and cannot be recovered until the property is sold.

Position Statement
The federal government should continue to provide adequate funding for cleanup and
redevelopment of our nation's brownfields sites and enhance the cost recovery of
environmental remediation and cleanup expenditures by providing either current deduction
or short amortization periods for those costs.




                                                                                                 11
      TAX                               CURRENT LAW                              LEGISLATIVE/REGULATORY STATUS/OUTLOOK                                     INSTITUTE POSITION
                   Capital gains are taxed at a maximum rate of 15%.       The current 15% rate will revert to 20% as of             It is in our nation‘s best interest for Congress to
                                                                           January 1, 2011 if Congress does not act.                 encourage real estate investment in the United States
                   Depreciation recapture is taxed at a rate of 25%.                                                                 by creating a tax system that recognizes inflation and
                                                                           The depreciation recapture rate is presently 25%.         creates a meaningful differential between the tax
 CAPITAL GAINS                                                             Unless it is changed, it will remain at 25% as of 2011.   rates for ordinary income and those for capital gains.
                                                                                                                                     The Institute supports a level playing field for those
                                                                                                                                     who choose to invest in real estate and thus opposes
                                                                                                                                     rates for depreciation recapture that are higher than
                                                                                                                                     the capital gains rate.
                   A common practice among real estate partnerships        House Ways and Means Committee Chairman                   By increasing the tax burden on real estate
                   is to permit the general partner to receive some of     Charlie Rangel has indicated that “everything is on       partnerships, an increase in the carried interest tax
                   the profits through a "carried interest.” The general   the table” as part of his plan to restructure the         rate would make real estate a less attractive
                   partner's profits interest is "carried" with the        current tax code. This could mean eliminating the         investment.
                   property until it is sold. When the property is sold,   current capital gains treatment for any carried
                   the general partner receives the value of its carried   interest of a real estate partnership. Thus, the tax      We oppose any proposal that would eliminate capital
CARRIED INTEREST   interest as capital gains income.                       rate on income from a carried interest could              gains treatment for any carried interest of a real
                                                                           increase from 15% to a maximum of 35%.                    estate partnership.

                                                                           No effective date has been proposed, leaving open
                                                                           the possibility that the tax-writing committees will
                                                                           be seeking new revenue sources throughout 2009
                                                                           and 2010.
                   The enactment of the 1993 Tax Act changed               The extension of the depreciable life to 39 years was     The current 39-year time frame does not accurately
                   depreciable life for a nonresidential building to 39    intended to be in return for favorable passive loss       reflect the useful life of a building and its components.
                   years (residential property remained at 27.5 years).    tax law and other tax law changes in 1993.                The Institute supports depreciation reform for
                                                                           Unfortunately, the Internal Revenue Service (IRS)         nonresidential and residential real estate that secures
                   The 39-year depreciable life applies to properties      did not interpret the 1993 law in such a way to be        a significantly shorter cost recovery period for
                   placed in service on or after May 13, 1993.             favorable to commercial real estate thereby               commercial real estate without adding complexity or
 DEPRECIATION
                                                                           eliminating almost any benefit to the commercial          creating artificial acceleration of deductions and
                                                                           real estate industry.                                     accurately reflects the economic life of the property.

                                                                           Depreciation may become part of the tax overhaul
                                                                           debate this year, however, there are currently no
                                                                           proposals related to depreciation.
                   In 2009, the exclusion is $3.5 million with a           Most believe that Congress will attempt to revise         We support the repeal of the Estate Tax but oppose
  ESTATE TAX       maximum rate of 45%. In 2001, legislation was           the Estate Tax for 2010 and beyond. Probable              the portion of the repeal that requires the use of so-
                   adopted to phase out the Estate Tax, with full repeal   revisions would resemble the rules in effect for          called “carryover basis.” If the Estate Tax were to be
               occurring in 2010. However, the Estate Tax will be       2009: An estate tax exclusion of around $3 million,      revised, the Institute supports the lowest possible rate
               reinstated as of January 1, 2011 unless Congress         maximum rates of around 40%, stepped up basis            (but opposes any rate higher than the maximum
               acts. If the tax is reinstated, it will revert to pre-   (current law) and a full marital deduction. However,     individual tax rates) and a substantial exclusion.
               2001 law with a small exemption amount and very          no specific time frame has been determined for this
               high rates. During 2010, so-called “carryover basis”     effort. Due to the current health care debate, it is
               rules will apply. Under carryover basis, the heirs       unclear when Congress will act to extend the
               would measure gain from any subsequent sale using        current law or make it permanent.
               the value (or basis) of the property in the hands of
               the decedent.
               The 2001-2003 Bush tax cuts included tax reductions      Falling tax revenues and increased government            The Institute supports tax policy that would encourage
               in the federal income tax brackets, which included a     spending due to the economic crisis have put             investment in the commercial real estate industry.
               33 and 35 percent rate for the top two income            lawmakers under pressure to seek new revenue
               brackets. If Congress does not act, on January 1,        sources. This could mean allowing the income tax
               2011, the current 33 percent rate will revert back to    reductions in the 2001-2003 Bush tax cuts to expire
               35 percent and the current 35 percent rate will          in 2011 or possibly repealing some of these tax cuts
               increase to 39.6 percent.                                before their expiration date.

                                                                        President Obama’s pledge not to raise taxes on the
 INCOME TAX
                                                                        middleclass makes it likely that the Democratically-
                                                                        controlled Congress will discuss increasing the top
                                                                        two income rates or allowing them to expire in
                                                                        2011.

                                                                        If the top two income tax rates increase, less money
                                                                        will be available for high income earners to invest in
                                                                        commercial real estate, putting more pressure on
                                                                        the industry.
               The Emergency Economic Stabilization Act of 2008         Currently there are no opposing views about the          A 39 year depreciable life for tenant improvements is
               extended the 15-year straight-line cost recovery for     merits of a 15-year cost recovery period for             unrealistic. A realistic cost recovery period, such as
               qualified leasehold improvements through January         qualified leasehold improvements.                        10-15 years, provides an incentive for building owners
               1, 2010 for property placed in service after                                                                      to upgrade and improve their space.
  LEASEHOLD
               December 31, 2007. It also extended the 15-year          Also, Congress has reached a consensus that a 39-
IMPROVEMENTS
               cost recovery period for depreciation of certain         year recovery period is too long. An extension of
               improvements to retail space through January 1,          the 15-year recovery period will likely be debated
               2010 for property placed in service after December       against other tax cuts because of its cost to the
               31, 2008.                                                federal government.
               As part of the Budget Reconciliation Act of 1993,        While House Ways and Means Committee Chairman            The Institute believes that active or material
PASSIVE LOSS
               Congress qualified that real estate professionals        Charlie Rangel has indicated that “everything is on      participants in real estate should be allowed to deduct


                                                                                                                                                                         13
who spend at least 750 hours and half their time          the table” as part of his plan to restructure the    all cash and non-cash rental losses against their other
annually in real estate activities will be permitted to   current tax code, at the moment passive loss rules   income and should be afforded the same benefits that
use losses on rental real estate to offset any income.    have not yet been part of the overhaul debate.       other businesses have within the tax code.
Individuals may also qualify if the taxpayer works in
the real estate field, he or she must own at least 5%                                                          The Institute urges the IRS to revise passive tax loss
of the business in order for the time worked to                                                                regulations to mirror the original intent of federal
count (if the taxpayer is not 5% owner the entire                                                              legislators in enacting a change made in 1993 to the
year, the portion of the year that the taxpayer is 5%                                                          passive loss tax law, specifically removing the 5%
owner may be prorated for that time.)                                                                          ownership provision. Additionally, the Institute urges
                                                                                                               the IRS to index the exception rules for inflation.
Furthermore, in order to protect individual
investors, the passive loss rules included an
exception to assure that individuals with moderate
incomes could continue to invest in real estate as
individual owner-landlords. Under the exception, an
individual with less than $100,000 of adjusted gross
income (AGI) could deduct up to $25,000 of losses
from rental real estate from other non-real estate
income. The amount of rental losses that an
individual can write off is proportionately phased
out between $100,000 and $150,000. For example,
if an individual’s adjusted gross income is $125,000,
he/she can write off $12,500 in rental losses in the
year of the loss. If an individual is an active
participant and his/her adjusted gross income is
$150,000 or more, he/she can write off no rental
losses on his/her tax return in the year of the loss.

The exception was not indexed for inflation. Had it
been indexed for inflation, the adjusted AGI amount
would now be $182,495 and the phase out at
$150,000 would now be $273,742. In addition, the
$25,000 cap on allowable losses would now be
$45,624. The failure to index has had the effect of
diminishing the pool of likely investors who would
operate as real estate investors or part-time
landlords. On top of this, inflation has not kept pace
with real estate prices, so the gap is even greater.


                                                                                                                                                      14
                 Real Estate Mortgage Investment Conduit (REMIC) is     On September 15, 2009, the U.S. Department of            The Institute supports legislation that amends the
                 a tax vehicle created by Congress in 1986 to support   Treasury issued final guidance for commercial            REMIC rules to allow more common modifications to
                 the housing market and investment in real estate by    mortgage loans held by a Real Estate Mortgage            property in order to make securitization more
                 making it simpler to issue real estate backed          Investment Conduit (REMIC).                              attractive to commercial borrowers.
                 securities. REMICs are essentially the vehicle by
                 which loans are grouped into securities.               Under the new guidance, Revenue Procedure 2009-          Updated IRS guidelines should provide much needed
                                                                        45 describes the conditions under which                  flexibility for owners with properties utilizing REMICs
                 Regulations implemented over 15 years ago limit        modifications to certain mortgage loans will not         and facilitate better communication and planning
                 commercial property owners with securitized            cause the IRS to challenge the tax status of REMIC’s     between the servicer and the borrower.
                 mortgage to reposition their property to meet          or investment trusts. In other words, the guidance
                 changing economic trends.                              increases the flexibility given to servicers to modify
                                                                        commercial mortgages within a REMIC by allowing
                                                                        special servicers to make significant modifications
                                                                        without the REMIC losing its tax-free status.

                                                                        Moreover, the new guidelines permit a change in
 REAL ESTATE                                                            the terms to be negotiated if, based on all the facts
  MORTGAGE                                                              and circumstances, and after meeting the threshold
 INVESTMENT                                                             for a qualified loan, the holder or servicer
   CONDUIT                                                              reasonably believes there is a “significant risk of
   (REMIC)                                                              default” of the loan upon maturity of the loan or at
                                                                        an earlier date, and that the modified loan will
                                                                        present a substantially reduced risk of default.

                                                                        Furthermore, the IRS issued final regulations under
                                                                        1.860G (T.D. 9463) expanding the list of exceptions
                                                                        that will not be considered “significant
                                                                        modifications” of an obligation held by a REMIC.

                                                                        The final regulations issued expands the list of
                                                                        permitted exceptions to include changes in
                                                                        collateral, guarantees and credit enhancement of an
                                                                        obligation as well as changes to the recourse nature
                                                                        of an obligation.

                                                                        No further REMIC regulation or legislation is
                                                                        currently proposed.
1031 LIKE KIND   Section 1031 of the Internal Revenue Code allows       No legislation related to 1031 Like Kind Exchanges is    The 1031 Like-Kind Exchange is an integral part of a


                                                                                                                                                                         15
EXCHANGE     investors to defer capital gains taxes on the           expected in 2009. However, the IRS may look into     real estate practitioner’s transaction portfolio.
             exchange of like-kind properties. 1031, or tax-         the role of qualified intermediaries and could       Therefore, every phase of the transaction should be
             deferred, exchanges hold great advantages for both      possibly announce regulations or other guidance to   retained. The Institute opposes any federal regulatory
             investors and real estate professionals. An             protect investors' assets.                           or legislative action that jeopardizes the ability of
             exchange is defined as a reciprocal transfer of real                                                         investors to partake in this tax-deferred real property
             property that has certain tax advantages over a sale.                                                        transaction.
             “Like-kind” is defined as any real property for any
             other real property if said property(ies) is held for                                                        Safeguards should be available to protect the real
             productive use in trade or business or for                                                                   estate investor’s assets during every phase of the
             investment.                                                                                                  transaction, particularly during the phase when the
                                                                                                                          qualified intermediary holds property and funds on
             A qualified intermediary (QI) facilitates the tax-                                                           behalf of the investor. The Institute opposes any
             deferred exchange by holding the net sales                                                                   regulation or legislation that would render the
             proceeds from the seller/exchangers relinquished                                                             transaction more difficult and/or less appealing to
             property in an account that prevents constructive                                                            investors.
             receipt by the seller/exchanger. The QI then
             releases the funds upon settlement of the substitute
             property by the seller/exchangers. The use of a QI
             when entering into a tax-deferred exchange is
             mandatory when the QI safe harbor is elected. The
             QI cannot be a related party to the seller/exchanger
             in any way that would allow the seller/exchanger to
             influence the QI to release the funds prematurely.

             Upon closing the sale of a property, there is a 45-
             day period in which an investor must identify
             properties they would like to exchange into and a
             180 day period (which includes the 45 days) in
             which to close on the identified property. The new
             property price has to be at least equal to the net
             sales price of the old property. If not, the investor
             pays tax on any cash, boot (sometimes taxpayers
             participating in a like-kind exchange receive cash or
             other property in addition to the like-kind property.
             This non-like-kind property is referred to as a
             “boot”), or net mortgage relief received.
TAX ISSUES
                                 CURRENT LAW                               LEGISLATIVE/REGULATORY STATUS/OUTLOOK                        HOW THIS ISSUE AFFECTS YOU
WITHOUT


                                                                                                                                                                 16
STATEMENTS OF
    POLICY
                The AMT was created in 1969 to prevent a small         In October 2008, the Emergency Economic                   The Emergency Economic Stabilization Act of 2008
                number of wealthy Americans from evading paying        Stabilization Act was signed into law. This legislation   prevented an estimated 26 million Americans from
                taxes. Over the years the AMT has come to affect       included a temporary “patch” provision that               having to pay more during the 2008 tax year.
                more people every year because it is not indexed for   prevented most middle income tax payers during
ALTERNATIVE
                inflation.                                             the 2008 tax year.                                        Present AMT rules are complex and burdensome.
MINIMUM TAX
   (AMT)
                The Emergency Economic Stabilization Act of 2008,      However, if Congress does not act soon, millions of
                enacted on October 3, 2008, provides Alternative       middle class Americans could pay more taxes for the
                Minimum Tax (AMT) relief for the 2008 tax year.        2009 tax year.




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DOCUMENT INFO
Description: Ccim Commercial Real Estate document sample