Agenda Summary National Association of REALTORS® 2011 REALTORS® Conference Anaheim Marriott Hotel Orange Co. 1 - 3, Lobby Level Friday, November 11, 2011 1:30 p.m. - 4 p.m.
Chair: J.D. Rinehart, Rock Hill, SC Vice Chair: John Vranas, Lincolnwood, IL Committee Liaison: Committee Executive: Linda Goold, Washington, DC
I. Call To Order
II. Approval of Previous Meeting's Minutes
III. Unfinished Business
A. Conservation Easements Conservation easements are incentive tools for land use management that allow property owners to prohibit development on a portion of land sold while maintaining private property rights. For some members of the Realtors Land Institute (RLI), conservation easements (CE) have spurred sales in some markets during the most recent economic downturn.
The current incentives that make CEs attractive as an investment and tax mitigation tool for some landowners, which apply to a landowner’s federal income tax, include:
• CE donations are tax deductible, but deductions are limited to 30% of the donor's adjusted gross income (AGI). • A donor can take deductions for 6 years. • C-corporations deductions are limited to 10% of their AGI.
RLI supports the current form of the CE tax deduction. It must be noted, however, that abuses of CEs have occurred. To address these concerns, RLI believes that Congress should establish more effective oversight of transactions that use conservation easements.
In addition, RLI supports:
(1) A 99- year maximum cap on CEs; (2) Allowing owners to elect the number of years the CE will be in effect (with a minimum CE period of ten years) and with a corresponding ceiling on the tax deduction to account for the diminution of the value of the property. If cancellation of the CE occurs prior to the ten-year minimum, the owner should pay a penalty equal to the amount of net tax credit issued to the owner at the time of the easement, plus interest and penalties, similar to interest and penalties charged to the property owner in the cancellation of other USDA programs such as the Conservation Reserve Program (CRP) and the Wetlands Reserve Program (WRP); and, (3) Encouraging the development of a “recapture of appreciation or gain” component to CEs, that in the event title to the subject property is sold or transferred outside of the owner’s immediate family, within ten years of the date of the easement, any monetary gain from the sale of the subject property realized by the owner, greater than the appraised value after the implementation of the easement, shall be taxed at the same rate as the net tax credit issued to the owner at the time of implementation of the easement.
B. Carried Interest/Expiring Provisions (The 2013 Convergence) Many real estate partnerships are organized with general partners, who contribute their expertise (and, occasionally, some capital) and limited partners who contribute money and property (capital) to the enterprise. Generally the profits of the partnership are divided among the limited partners who contribute capital. A common practice among real estate partnerships, however, is to permit the general partner to receive some of the profits through a “carried interest,” even when the general partner has contributed little or no capital to the enterprise. The general partner’s profits interest is “carried” with the property until it is sold.
During the time that the real estate is held, the general partner receives compensation and fees in the form of ordinary income. The limited partners receive both ordinary income from operations and capital gains income from any profits generated during the year. When the property is sold, the limited partners receive their profits distributions (the earnings on the capital they have invested) as capital gains. The general partner also receives the value of its carried interest as capital gains income.
Congress has proposed treating the income from a general partner’s carried interest as ordinary income. Limited partners would continue to receive capital gains treatment for their share of any capital gain.
A real estate sales agent and/or broker will not be directly affected by the proposal, as it applies only to real estate partnerships that have carried interests. Real estate brokerage is rarely, if ever, organized in that model. Real estate investment, however, is typically held in partnership form. Not all partnerships include both general and limited partners or carried interests for the general partners, but real estate investments that are held in that form would be harmed by the proposal. By increasing the tax burden on these real estate partnerships, and particularly on those with operational expertise, the proposal would make real estate a less attractive investment. When the value of real estate investment is impaired, there is an indirect impact on all real estate. Thus, all REALTORS® have a stake in this proposal.
NAR opposes any proposal that would eliminate capital gains treatment for any carried interest of a real estate partnership. Rationale: Utilization of the carried interest mechanism for real estate partnerships is a standard operating practice that has not, historically, been seen by either courts or policy makers as a “loophole.” Rather, capital gains treatment for income from a carried interest is seen as a reward for entrepreneurs who take the risks inherent in new projects and in making capital investments. Capital gains treatment of carried interests also mitigate the impact of inflation on a long-term investment.
When Congress lifted the debt ceiling in July 2011, they also created a ‘Super Committee” charged with the task of finding an additional $1.4 trillion in deficit reductions. That package can be made up of any configuration of spending cuts and/or new revenues that can garner 7 votes. The Super Committee has 12 members, evenly divided between the House and Senate and evenly divided by party. If the Super Committee includes new revenues in the package they agree to, many observers believe that changes to the carried interest rules would be high on the list of possible new revenues.
C. Homeowner Visa In an effort to stimulate the housing market, Senator Chuck Schumer (D-NY) has introduced S. 1746, the Visa Improvements to Stimulate International Tourism to the United States of America Act. The proposed legislation would ease visa requirements many different ways, including the purchase of a home. Under the bill, if a non-U.S. resident purchases one or more homes using at least $500,000 cash and stays in the property for a minimum of 180 days a year they would qualify for a visa. The alien would not be allowed to work under this specific visa, nor would they be eligible for any form of assistance or benefits.
IV. New Business
A. Housing Summit Issues (Full Summary) 1. HOMEK Individuals who have access to an IRA, Roth IRA or 401(k) plan would be permitted to allocate up to 50% of their savings in the account to a downpayment account for a first-time homebuyer. Employer matching funds could not be part of the allocation. Withdrawals for the purchase would be penalty-free. They would remain taxable as ordinary income, but the tax rate would be sharply discounted. A lifetime limit of $50,000 for downpayments is imposed
2. Merkley Tax Credit Proposal Create a permanent $5000 homebuyer tax credit for low- to moderate-income individuals for a first-time purchase. The purchaser would be required to match the credit dollar-for-dollar. Eligible purchasers would be those who will not itemize their taxes.
3. Housing Ownership Voucher In today’s market, it is often substantially less expensive to own a home than to rent one. This is particularly true in areas where the value of owner-occupied housing has declined. The proposal would convert the rental subsidy to an ownership subsidy where eligible individuals would receive a voucher for the difference between the cost of principal, interest, taxes and a repair fund for a purchased home and 30% of their earnings. A mortgage would guarantee that the costs to the housing authority would remain fixed, thus reducing costs over time. (The proposal assumes that rent expenses will continue to increase over the years, so the present value of the ownership voucher would be less than the present value of a 30-year rental subsidy.) Programs would be administered by local housing authorities under procedures and qualification rules similar to existing Section 8 programs.
4. Penalty-free IRA Withdrawals Generally, individuals who own Individual Retirement Accounts (IRAs) or Roth IRAs may not make any withdrawal from a retirement account until they have reached age 59 and six months. If funds are withdrawn before age 59 1/2, the withdrawn amounts are taxable in full as ordinary income and a 10% penalty is also imposed on the amount withdrawn. If an individual’s 401(k) plan permits early withdrawals, identical rules apply.
One exception to this rule applies to first-time homebuyers. Under the exception, the purchaser (as well as the purchaser’s parents and grandparents) can make a combined withdrawal of up to $10,000 from retirement accounts in order to make a downpayment on the purchase of a home. The amounts withdrawn continue to be treated as ordinary income and taxed in the year of the withdrawal.
Proposal: Extend this penalty relief to individuals who are in arrears on their mortgage payments so that they can stay in their homes.
B. Tax Reform and the MID Members of Congress and the White House are facing growing pressure from constituents, Wall Street, and foreign governments to put the nation’s financial house in order. To date the nation’s national debt is approaching $15 trillion, the 2010 deficit was $1.3 trillion, and while 2011 is not yet over this year’s deficit is expected to be greater than that.
Past attempts by D.C. to address this issue include a Debt Reduction Commission proposal, the Senate Gang of Six proposal, the Biden Group, the House Budget Committee Chairman Paul Ryan’s proposal, the Obama Fiscal Year 2012 budget proposal, the GOP proposed Cut, Cap and Balance proposal, the Reid plan, the McConnell plan, and now the creation of the “Super Committee.” This committee was created as part of the debt ceiling increase legislation the President signed in early August.
While a number of these proposals have proposed changes to tax benefits for property owners, including the MID, to date Congress has yet to pass anything that significantly increases taxes on any sector. However, it is inevitable that this will change in the coming years.
Looking forward there are dates that Congress will have to take action by that will bring the issue of revenue into the discussion. • The government’s fiscal year will begin on October 1, 2011. Congress must pass a spending bill prior to this date or the government will shut down. Congress will not pass all of its appropriation bills so they will pass a short term Continuing Resolution to temporarily fund the government for a few months which will give them more time to finalize a budget. They are also likely to wait and see what is produced by the Super Committee. • According to the debt ceiling increase law the Super Committee has until November 23 to draft a plan that will save the government $1.5 trillion minimum. Congress then has until December 23 to pass the plan (which will only allow for an up or down vote, no amendments). Should Congress fail to meet these requirements, then an automatic $1.2 trillion spending cut would kick in with half of it going towards defense spending and half going towards non-defense spending. The Super Committee will be allowed to raise revenue if they want.
While no one idea has gained significant traction to even begin the process of moving through Congress, some proposals that have gained some traction in the past include:
• A simplification of the tax code, if not a full reform of it. The goal would be to ultimately lower tax rates for the current income tax brackets. While this is widely supported, it is unclear what deductions and credits would be eliminated to cover the cost of reducing the rates. • Most politicians support leaving the MID alone, or at least maintain it in some form. This means there are many in Congress who are open to the idea of limiting the MID’s benefit. Targets include second homes, home equity loans, higher earners, and the revamping of the deduction into a tax credit. • Allowing the bush tax rates to expire, including allowing the current capital gains rate of 15 percent to increase to 20 percent.