Federal Taxation Committee National Association of REALTORS® 2006 REALTORS® Conference & Expo HiltonNew Orleans Riverside Grand Salon D, Street Level Friday, November 10, 2006 1:30 PM - 4:00 PMChair: Gary Thomas, CA Vice Chair: Lance Lacy, TX Committee Liaison: Nick D’Ambrosia, MD Committee Executive: Linda Goold, DCPurpose: Committee members will review several new proposals that the Senate Finance Committee is considering related to information reporting, tax compliance and like-kind exchanges. The Committee will also review the Fair Tax proposal for a National Retail Sales Tax I. Call To Order II. Approval of Previous Meeting's Minutes
III. Unfinished Business
A. Legislation Wrap-up -- 109th Congress (2005 - 2006)
B. Fair Tax -- H.R. 25, the National Retail Sales Tax
TheFair Tax Act of 2005 (H.R. 25) would repeal the current tax system of income tax, employment tax, and estate taxes and replace the system with a national sales tax based on consumption.
H.R. 25 would set the tax rate at 23 percent in 2007 and would allow for adjustments to the rate in subsequent years. It would call for the end of funding for the IRS by Fiscal Year 2009 and set up a smaller tax bureau within the Treasury Department.H.R. 25 would have the states be the primary authority for collection of sales tax revenue and then be responsible for the remittance of those taxes to the Treasury Department. Families would be allowed credits and refunds based on family size and income.REALTORS® have a standing policy which opposes a flat tax or a national sales tax.IV. New Business
A. Like-kind Exchange Issues
The like-kind exchange provisions of Internal Revenue Code Section 1031 permit ataxpayer to defer taxation on capital gains if, within 45 days of selling a "relinquished property," the taxpayer identifies a "replacement property" and closes on the acquisition of that property within 180 days of the sale of the first property. The regulations for these rules provide a roadmap for securing the benefits of deferral and a well-established body of law governs these transactions.
REALTORS® support the like-kind exchange provisions of current law and the elimination of the 45-day identification period for 1031 exchanges. If a real estate investor were to create a hierarchy of tax provisions based on their utility and the benefits provided, the like-kind exchange rules would be at or nearthe top of the list. Real estate investments are, by their nature illiquid and they also require substantial investment of capital. The exchange rules permit an investor who can satisfy the criteria to preserve capital for ongoing real estate investment.
The exchange rules have not been modified since about 1991. Two developments, however, have brought new scrutiny of the rules. The first of these is an effort to repeal the exchange rules that has been mounted by farmers located primarily in Iowa and Illinois. They believe that the exchange rules have the effect of driving up the price of farmland. A second development is the rise of the Tenant-in-Common (TIC) market since 2002.
In 2007, the Senate Finance Committee is likely to review several aspects of Section 1031. There are numerous areas they will examine, ranging from the basic to the more complicated of matters concerning 1031 exchanges. The more basic issues to be examined are whether the IRS Form 8828, which is used to figure and report the recapture tax on a federal mortgage subsidy, should be made a mandatory filing; and examining how long a 1031 exchange must be held before a replacement property can be purchased. They may also examine the issue of withholdings on boot. Boot is any part of a 1031 exchange that is not like-kind property. This can be other property or even cash. An example would be if you are sellinga house for $500,000, but doing a 1031 exchange on a house that cost $400,000, and you are receiving $100,000 in cash, the $100,000 would be considered boot. The boot must also be recognized as gain under current law.More complicated issues that may be addressed are the deferral of fees and collection of fees involved in TIC properties. The issue surrounding deferral amounts on TIC properties relates to fees. The fees associated with TICs are saidto range as high as 25% of the acquisition cost. Congress may examine whether taxpayers engaged in exchanges should be permitted deferral treatment for these fees. Congress will also examine whether deferral treatment is appropriate for collectibles.
B. Tax Reform -- Self-employment Challenges C. The "Tax Gap" and REALTORS® -- New Recommendations
