Federal Taxation Committee
Agenda Summary
2006 Federal Taxation Committee
National Association of REALTORS®
2006 Midyear Legislative Meetings & Trade Expo
Omni Shoreham
Ambassador Room, Lower Level
Wednesday, May 17, 2006
10:00 AM - 12:00 PMChair: Gary Thomas, CA
Vice Chair: Lance Lacy, TX
Committee Liaison: Nick D’Ambrosia, MD
Committee Executive: Linda Goold
I. Call to Order
II. Approval of Previous Meeting's Minutes
III. Unfinished Business
A. Employer-provided Housing Assistance
Due to the high cost of housing, employee down payment assistance programs are becoming more frequent among employers as a means of attracting and retaining employees. However, under current law there are no incentives for employers to offer this benefit and this type of assistance is often treated as taxable income to the employee. In September 2005 C.A.R took the position to “SUPPORT” in concept the creation of employee benefit plans designed to a) give employers an incentive to provide their employees with housing down payment assistance and/or b) make the down payment assistance tax-free to theemployees.During the first session of the 109th Congress two bills were introduced concerning employee housing down payment assistance. S. 1330 (Clinton D-NY) currently has six cosponsors and is in the Senate Committee on Finance. H.R. 3194 (Velazquez D-NY) currently has 26 cosponsors and is in the House Subcommittee on Housing and Community opportunity. Both bills would give employers a tax credit of up to 50 percent of $10,000 or 6% of the purchase price of the employee's principle residence (whichever is less). If the housing assistance is for a rental, then the amount of assistance is capped at $2,000. In addition, the housing assistance provided by the employer will be excluded from the employee’s taxable income.In order to qualify for the employee housing downpayment assistance and to have the assistance be tax-free, the employee must be a first-time homebuyer, which includes a personwho did not own a principal residence two years prior to the purchase of the home. Also included as a first-time homebuyer for the purpose of this legislation is any person who did not own a principal residence located within 50 miles of the employertwo years before the purchase of the home. Additionally, the employee may not earn more than 120% of the median gross income of the area where the house is. Finally, the home being purchased may not exceed 90% of the average area purchase price or 3.5 times the 120% income cap for the area, whichever is greater. For example, if an area’s average home price was $100,000 and120% of the median gross income of the area was $30,000, the home purchase price would be capped at $105,000 ($30,000x 3.5) because it is greater than $90,000 (90% of average home price).B. 2005 Tax Reconciliation
C. Capital gains
D. Leasehold improvements
Until 2004, a landlord who made improvements to leased property in a nonresidential building was required to amortize the cost of those improvements over the life of the underlying real property, i.e., 39 years, rather than over a period that more nearly matched the lease term. These improvements include items such as upgraded electrical equipment, reconfigured interior space, telecommunications equipment, cable and similar technological updates. Between October 22, 2004 and December 31, 2005, these costs could berecovered over 15 years. As with prior law, if the lease terminated before 15 years had passed; any remaining balance in the tenant improvement account could be deducted. The 15-year life provision expired December 31, 2005, butthe rule permitting deductions for unused depreciation deductions at the termination of a lease is a permanent rule.
NAR supports efforts to measure more accurately the depreciable lives of buildings and to conform amortization periods for tenant improvements more closely to the term of the lease.
Property owners are required to recover their costs for building investments and for tenant improvements over periods of time that have no relation to the economic life of the assets. Thisartificially depresses rates of return. Correcting the depreciation rules and the tenant improvement amortization rules makes upgrades for technology and modernization more economically feasible.
Legislation to renew and extend the 15-yearlife for leasehold improvements is included in H.R. 4297, a $70 billion tax reconciliation bill currently in a House-Senate conference. While the leasehold improvement provisions are identical in the House and Senate versions of H.R. 4297, the capital gains provision in the bill has caused substantial controversy. The conference is at a stalemate, so the leasehold improvement cost recovery period has reverted to the 39-year requirement of prior law. Conferees on H.R. 4297 have the authority to make the renewal of the 15-year life provision retroactive to January 1, 2006, but there is no guarantee that they will do so.
E. Brownfields Deductions
As a general rule, site preparation costs incurredby real estate developers are not currently deductible, but rather must be capitalized into the basis of the land. A special exception to this rule permits environmental cleanup costs associated with so-called "brownfields" to be deducted in the year thecosts are incurred. Brownfields are properties that are certified by state agencies as being contaminated by specific hazardous substances. This special brownfields deduction was temporary and expired December 31, 2005.
NAR supports the deduction for clean up costs.
Environmental remediation benefits all communities where land is currently unusable because of contamination. This deduction is a significant incentive for developers to undertake projects on brownfield properties. Many of these sites are in older, deteriorating communities. Development incentives can help revitalize these communities. These incentives are also consistent with Smart Growth initiatives.
A provision to extend the deduction beyond its 2005 expiration is included in the 2005 tax reconciliation package (H.R. 4297) that has not yet been resolved in conference. Both the House and Senate versions of H.R. 4297 would expand the list of the eligible expenditures to include petroleum contaminants.
F. FIRPTA -- Seller PrivacyOver the past several years as identity theft has become more of a concern for everyone, sellers have grown increasingly uneasy with providing their taxpayer identification numbers. The concern has become so great that some sellers are refusing to provide the required affidavit to the buyer or are providing an affidavit with the seller’s taxpayer identification number redacted. This creates a dilemmafor buyer’s who may be liable for the sellers’ tax liability from the sale of the real property if they do not receive a fully completed sellers’ affidavit. C.A.R. believes a seller should be able to provide the information require by FIRPTA to escrow or another settlement provider as an alternative to providing that information to the buyer. In the January 2005 meetingsC.A.R. adopted a policy which stated, “That C.A.R. in conjunction with N.A.R., ‘SUPPORT’ legislation that would permit a seller to provide the information required by the Foreign Investment in Real Property Tax Act (FIRPTA) to escrow oranother settlement provider as an alternative to providing that information to the buyer.”NAR has presented proposed legislation to the House Ways and Means Committee Staff, and are working with them to finalize the wording. At this time, however, it is unclear what, if any, tax legislation this provision could be attached to.
IV. New Business
A. Tax ReformAn ideal tax system would be both fair and simple. In practice, however, fairness isthe enemy of simplicity and vice versa. The current system is perceived as neither fair nor simple. Nonetheless, the provisions that apply to real estate, particularly homeownership, do not contribute to complexity. A primary reason for the charge of unfairness in the tax system is the structural anomaly that forces more and more middle income families to pay the Alternative Minimum Tax (AMT). The AMT was designed to assure that wealthy individuals did not combine lawful deductions to avoid paying incometax. Today, however, the tax falls most heavily on married couples with children and who earn between $75,000 and $200,000 a year, and who live in states with high income and/or property taxes. A second source of unfairness and complexity is the proliferation of credits, phase-ins, phase-outs and special rates that make the system more complicated than it was a decade ago.
NAR embraces no single tax reform model such as a flat tax or a retail sales tax. Rather, NAR acknowledges the complexity of the tax system and seeks to assure that tax reforms support the goals of homeownership and freedom to buy, maintain and sell real estate. NAR notes that the homeownership tax provisions are amongthe most widely used and most readily understood tax provisions.
Sweeping tax reforms in 1986 devastated wide sectors of the commercial and investment real estate market because Congress made harsh restrictions retroactive. Today, the real estate markets have generally recovered. Any far-reaching tax reform involves winners and losers; so REALTORS®, homeowners, and investors all have a significant stake in tax reform. Real estate has fueled the U.S. economy for more than five years. That strength must be maintained. Reducing real estate tax benefits could drive down property values and negatively impact the nation's economy.
In January 2005 President Bush appointed a Tax Reform Advisory Panel to examine the AMT problem, identifyways to simplify the tax system and to recommend reforms to make the system fairer. The President directed the Commission to "recognize" the importance of homeownership in our society. On November 1, 2005 the President's Panel released its report recommending proposals that, in NAR's view, will drive down real estate values and devastate the nation's housing economy.
The centerpiece of the Panel's proposals is the conversion of the mortgage interest deduction from a deduction to a 15% tax credit and a reduction of the $1 million cap on mortgages to the local FHA loan limit. Additionally, the Panel recommends repeal of the deduction for property taxes and elimination of mortgage interest deductions for second homes. NAR is strongly opposed to the Panel's proposals. To date, no Senator or House member has embraced the Panel's recommendations. In late February 2006, President Bush reiterated his support for retaining the mortgage interest deduction. Hearings on corporate taxation issues and on international taxation issues will be held in the Ways and Means Committee on May 9 and May 23, respectively. Note that the international taxation rules have not been revised since 1964. In addition, the tax rules affecting so-called C corporations (generally large corporations that are often publicly traded) have not been reviewed since the rise of the limited liability corporation/partnership. Accordingly, these two issues are the first to be discussed in congressional hearings.B. Estate Tax ReformThe estate tax laws have long been criticized for forcing the sale of illiquid family-held businesses after the owner's death because of the high estate and gift tax rate (currently 46 percent). Effective in 2010, the estate tax is repealed. In the interim, the estate tax exclusion gradually increases from $675,000 to $3 million and the estate tax rates are gradually reduced to a maximum of 45%. 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.
NAR supports estate tax repeal, but believes carryover basis to be unworkable.
The Committee may recommend action on the following item(s):
That NAR seek an estate tax regime that provides stepped-up basis for all inherited assets. If the scheduled 2010 estate tax repeal is rescinded, that NAR support a revision that permits stepped-up basis, taxes all assets in an estate at the same rate (i.e., rates would not depend on the type of asset), excludes an amount comparable to the $5 million exclusion that would be in effect in 2010, provides estate tax rates lower than or equal to the individual tax rates of the income tax structure and indexes the estate tax exclusion amounts.
Certainty is essential for families to plan for the passing of assets between generations.
The goal of estate tax repeal may not bereached.
Repeal opponents believe that the estate tax should be kept in place to assure that accumulations of wealth do not concentrate in small groups of families.
Certainty about estate taxes generally would benefit many REALTORS® with estate planning concerns. In addition, family-held businesses and investments would benefit from reforms allowing these assets to be passed easily from generation to generation.
The House has approved legislation to make the estate tax repeal permanent and retain carryover basis. Presently, the Senate does not have enough votes to make the repeal permanent. Some Senators have unsuccessfully tried to forge a compromise. Such a compromise would likely include stepped-up basis and lowerrates that prior law. Without legislative action, estate tax rates revert to 55% in 2011, and the tax-free portion of an estate would revert to $1 million.In January 2001 C.A.R. took the position to “SUPPORT” that “C.A.R., in conjunction with NAR, preserve the ‘stepped-up basis’ provision of current tax codes irrespective of modification or elimination of Estate Tax.”V. Adjournment
