Agenda Summary2007 Federal Taxation Committee National Association of REALTORS® 2007 REALTORS® Conference & Expo The Venetian Resort Hotel Casino Palazzo B, Level 5 Tuesday, November 13, 2007 1:30 PM - 4:00 PMChair: Lancy Lacy, TX Vice Chair: Dennis Patillo, TX Committee Liaison: Gary Thomas, CA Committee Executive: Linda GooldI. Call To Order
II. Opening Remarks
III. Approval of Previous Meeting's MinutesIV. Unfinished BusinessA. Like-kind Exchange -- Qualified Intermediaries C.A.R. Policy:That C.A.R., in conjunction with NAR, look into the issue ofaccommodators/qualified intermediaries of 1031 exchanges and how to safeguard exchanging taxpayers and our industry members vis-à-vis the practice of accommodators/qualified intermediaries.If a real estate investor utilizes a 1031 exchange, the profits from the sale of one property are directly used to purchase a second property and capital gains taxes are deferred until that property is sold. However, the business of 1031 exchange accommodators is largely unregulatedat the federal and state levels of government with hundreds of independent exchange accommodators across the country. In March, a Santa Barbara law firm filed a lawsuit charging two exchange accommodators, Qualified Exchange Services and Southwest Exchange, of stealing more than $95 million from 130 investors in 12 states. As a result of this type of incident, the California Legislature and some in Congress are considering if there needs to be legislation that would require the licensing of exchange accommodators, as well as requiring a fidelity bond and errors and omissions insurance.Congresswoman Eshoo is following the issue and if she feels a national response is necessary, has indicted she would be willing to introduce legislation. NAR is currently working with the Federation of Exchange Accommodators (FEA), which is the governing association for many of the accommodators on the issue. TheFEA is looking to tighten their regulations and set new requirements. Additionally, NAR has formed an internal and informal task force that will explore issues such as risk management for real estate professions who make accommodator referrals, new disclosure requirements for accommodators, increased fiduciary standards and whether these reforms need to be done on the state or federal level.B. Speaker: Hugh Pollard, First American Immediate Past President, Federation of Exchange AccommodatorsC. Mortgage Cancellation Tax Relief C.A.R. Policy:C.A.R. has previously taken the policy: “that C.A.R., in conjunction with NAR, pursue changes in federal law or relief of indebtedness income fromregulation to exempt from unfair taxation on the short sales of principal residences.”Under current law, if a mortgage lender forgives or cancels a debt, the taxpayer/borrower is required to recognize income and pay tax on the amount of the canceled debt. Exceptions are provided to this rule in the case of bankrupt or insolvent taxpayers. Rules are also provided that defer taxation for relief of debt on loans forcommercial and investment property, but the tax laws have never extended relief to an individual who sells a personal residence for an amount that is less than the outstanding debt on the property.
Example: Assume that an individual purchaseda home for $450,000. At the time of a subsequent sale, the outstanding mortgage balance might be $415,000. If the home sells for $400,000, the individual has incurred a non-recognizable capital loss of $50,000 and is short $15,000 to pay off the outstanding mortgage. If the lender forgives this $15,000 debt, then the homeowner must recognize the $15,000 as ordinary income and pay tax on it.
Legislation is needed to assure that mortgage debt that is canceled or forgiven is not treated as incomeand taxed on primary residences. On September 25, 2007 Chairman of the House Ways & Means Committee, Rep. Rangel (D-NY) introduced his own mortgage cancellation relief bill, H.R. 3648, the Mortgage Forgiveness Debt Relief Act of 2007. On September 26, 2007, H.R. 3648 passed out of the House Ways & Means Committee by a unanimous voice vote and on October 4, 2007 passed the House by a vote of 386-27.H.R. 3648 would remove taxes from mortgage cancellation relief provided on a mortgage of a primary residence. The tax relief would only apply to the acquisition indebtedness, plus personal improvementsof a primary residence and would not cover any amount over the acquisition indebtedness (plus personal improvements) if a loan has been refinanced with a “cash out” option. The relief would no apply to home equity lines of credit (unlessthe HELOC was used for personal improvements of the primary residence). The relief would apply to any forgiveness given on or after January 1, 2007.The language in the bill implies that acquisition indebtedness would cover an 80/20, 80/10/10, or other such loans as long as they were for the acquisition indebtedness. NAR believes that the IRS will interpret the language that way, but has yet to hear any formal response from the IRS.D. Modification of $250,000/$500,000Exclusion H.R. 3648 was marked up to cost $2 billion over 10-years. Under PAYGO rules, to offset this lost in revenue, H.R. 3648 made changes to corporate estimated tax rates and to rules governing second homes that are convertedinto primary residences. Currently, if a second home is converted to a primary residence and lives in for at least two out of the past five years, this home is allowed to use the $250,000/$500,000 capital gains exemption. H.R. 3648 would allowgain received once the house became a primary residence to be excluded from capital gains taxes (up to the same limits), but would tax gains attributed to the time when the house was not a primary residence, up to the previous 15 years. However, this rule will not count against any gain prior to January 1, 2008. A handout was distributed at the meeting, but I will attempt to give a short example as well. Since Congress did not make the changes retroactive, any gain realized prior to 2008 is still allowed in calculating the exemption. The new calculations will be a formula; it will be years the property was used as a primary residence (from 2008 onward) over the years the residence was owned (from 2008 onward). So if you bought the second home in 1990 for $300,000, then moved into it as a primary residence in 2010, then sold it in 2015 for $800,000 the formula would be as follows:Total gain: $500,000
Years owned after 2008: 7 (you do not include the years owned prior to 2008, even though you get to include the gain)
Years as primary residence after 2008: 5Gain allowed to be exempted: 5/7th of $500,000 or $357,000.It does not eliminate the capital gains exemption of $250,000/$500,000; rather it just changes the calculations to determine how much gain is exempted from capital gains taxes. If a homeowner (assuming married) gains $1,000,000 and lives in the second home for 5 of the 10 years owned, theywould still be allowed to exempt the entire $500,000. At this point the bill does not address a limit on how many times a homeowner can use this tax break to keep designating homes as second homes, then primary residences and using the capital gains exemption. However, that issue is being questioned and may be addressed. Additionally, this exemption does not apply to a property that was being used as a straight rental/investment property.E. Report -- Visitability PAG, Immigration PAG Final Report from the Visitability Working Group The Visitability Working group was comprised of members from the following committees:
Federal Taxation - Lance Lacy Federal Housing Programs - Iona Harrison Conventional Lending and Finance - John Veneris Land Use, Property Rights and Environment - Dick Dills and Dave Feeken Equal Opportunity Cultural Diversity - Marilyn Glazer and Milton Shockley (chair) REALTORS® Commercial Alliance - Cindy Chandler Smart Growth Advisory Board - Ken Jackson Housing Needs - Bob Caldwell Housing Opportunities Advisory Board - Jim Hamilton State and Local Issues - Dave Wluka
The Working group evaluated a recommendation made at Mid-year by the Equal Opportunity Cultural Diversity Committee that NAR support the concept of Visitability in Housing. This recommendation was referred back to committee by the Board of Directors with the creation of this working group.
The Working Group has finished its work and finalized a recommendation that will now once again be considered by the Equal Opportunity Cultural Diversity Committee. It is my expectation that the recommendation will be endorsed and forwarded to the Board of Directors in November. However, since each of the committees above has a stake in this recommendation, we have a process in mind for managing this recommendation. The following process was crafted by the working group and each working group member is prepared to help in the process.
1. The Recommendation will be considered as an action item by Equal Opportunity Cultural Diversity. If for some reason the recommendation is amended at the EOCD committee, it will also forward the original working group recommendation.
2. Each of the other committees is encouraged to treat this as an informational report to be made by the representative on the working group. I will provide you with the language of the recommendation with rationale for you to distribute to committee members. I will also provide the working group members and each of you with some talking points should questions arise.
3. The working group suggests that your committee take no action on this recommendation, but instead inform committee members that they may attend the EOCD meeting or PPCC to voice questions or comments. The recommendation is based on hours of considering and balancing the issues and concerns of the various committees.
4. PPCC will act on the recommendation from the working group and EOCD and it will move through the process to the BOD.
If committee members with questions and comments are directed to the EOCD and PPCC committees, this information reportshould take only a couple of minutes during your meeting.
If you have any questions regarding this recommendation or process, please ask me.
The recommendation is as follows:
That NAR believes that visitability, the ability to host visitors with mobility impairments, can be important in homes.
That NAR believes that any visitability policy should be defined as voluntary. Further, NAR believes that the market is the best mechanism to produce visitable housing and opposes any federal visitability mandates.
For the purposes of this policy, the key features of visitability apply to one level of the home. These are a no-step entry, passage doorways that provide at least 32” clearance, and a minimumof a useable half bathroom with a sink and water closet.
That NAR educate its members about the concept of visitable housing.
That NAR become a resource on visitable housing, compile best practices and examples of local and state building codes and make this information available to state and local associations.
V. New BusinessA. Carried Interests -- Real Estate Partnerships C.A.R. Policy:C.A.R. took no policyat our October meetings on carried interest. Both the taxation and the Federal Issues Committee choose not to take policy on the issue.Attention became focused on carried interest partially due to a private equity firm, Blackstone, having an IPO and announcing the extraordinarily large amounts of profits that Blackstone was able to realize using carried interest. This prompted Congress to examine the practice of carried interest and whether or not it should continue at capital gain rates or be changed to normal income rates, which is what current legislation is attempting to do.The House has introduced H.R. 2834, which is currently in the House Ways & Means Committee with 23 cosponsors. H.R. 2834 would eliminate taxing carried interest at capital gain rates (currently 15%) and instead tax them at the standard income rates (currently up to 35%). The Senate has introduced S. 1624, which is currently in the Senate Committee on Finance with four (4) cosponsors. S. 1624 currently focuses on private equity groups and does not specifically include real estate carried interest in the language of the bill, but it is expected that this will be amended in the future to include real estate and mirror H.R. 2834.Under most real estate partnerships when a private equity partnership is developed there are two categories of participants. There is the general partner (GP) and the limited partner(s) (LP). The LPs are the ones who contribute the capital to fund the projects. The GP either puts up a small (usually 1-2%) amount of capital, or none, but handles the financial dealings of the partnership and brings their expertise and experience to the project. This includes finding the property, taking care of the leasing, paying the taxes, and more. They are not simply day-to-dayproperty managers, but handle all the financial aspects of the partnership and the property.When that property is sold, the profits are divided, primarily among the LPs. However, there is a common practice in partnerships, including real estate partnerships, that gives the GP a portion of the profits. This is separate from his annual management fee which covers his salary and overhead. This part of the profit is known as carried interest. The carried interest (which can be up to 20% of the profit from the investment) is part of the setup of the partnership and is done to give the GP an incentive to push for the success of the partnership venture and is a return on their “sweat equity”.B. Alternative Minimum Tax -- Repeal, Revision 1. Surtax -- Bush tax cuts 2. Impact on capital gains 3. Payroll tax 4. Corporate tax rate 5. Small business expensing
There are numerous options being considered when it comes to Alternative Minimum Tax (AMT) reform. It ranges for how to handle a one-year to the total elimination of the AMT, which also means there is a range in cost from $50 billion to $1.2 trillion.One-year patch: The one-year AMT patch is included in H.R. 3996. H.R. 3996, the “Temporary Tax Relief Act of 2007” passed out of the House Ways & Means committee on November 1, 2007 by a party line vote. Included in H.R. 3996 is a one-year patch to the AMT which would raise the exemption level for AMT to $66,250 for joint filers and $44,350 for individuals. In addition, it includes a one-year extension of: state and local tax deduction, the increased contribution limits and carryover provisionswhen real property is donated for conservation purposes, extension of special rules for Qualified Mortgage Veteran Bonds, 15-year leasehold improvements, and Brownfield deductions. It also includes mortgage debt relief as well as an extension of PMI deduction through 2014. Offsets include a change in carried interest and modification to the rules concerning the capital gains exemption when a second home is converted into a primary residence (as discussed earlier). H.R. 3996 should be voted on in the House floor during the week of November 5th. If passed, it will face a strong challenge in the Senate where there are discussions of doing a one-year patch for the AMT without offsets, something House leadership has so far refused to consider.AMT repeal: Rep. Rangel (D-NY) is also introducing legislation, dubbed the “mother of all tax reforms”, that would repeal the AMT entirely. This is not expected to be debated until 2008. In order to offset the costs of the AMT repeal, Rangel proposes a 4% surtax on couples making $200,000 or above and 4.6% on couples earning $500,000 and above. These surtaxes will offset the AMT as well as other targeted tax cuts and an increase in the standard deduction. There are also reforms on deferring corporate compensation, tracking the basis price of securities, and other repeals or delays in certain business tax breaks; but in return the corporate tax rate is reduced to 30.5%.VI. Adjournment
