Hopefully, that $300 George W. sent out last year to everybody has been put to good use, because it does not appear there will be additional tax relief forthcoming in 2002, at least not for the real estate industry.
Overwhelmed by the terrorist attacks of Sept. 11, the nation’s capitol these days remains focused on responding to the tragedy and its resulting security issues, leaving little time for legislators to concentrate on other initiatives. Because of that, real estate industry representatives say it is highly unlikely that any of the tax relief measures being championed in Congress will make it through in the current environment.
“We’re not sure if anything is going to happen this year,” said Ron Burton, spokesman for the Building Owners and Managers Association International, a Washington, D.C.-based trade group. “The tax issues are just not on the board at all right now, and it doesn’t look they are going to be for a while.”
BOMA did manage some reductions in the leasehold depreciation allowance, a longstanding tax-relief issue that the group has championed for several years. But the changes included in the economic stimulus bill, which is expected to pass, only apply to a portion of the depreciation schedule and for a limited number of buildings, including those near ground zero in New York City. The measure was contained in H.R. 3090, a bill that also had the broader leasehold depreciation language and improvements to the capital gains tax. While neither of those made the final version, Burton characterized the depreciation piece, which did survive, as “a major victory” considering the circumstances.
Relief Efforts
Under that proviso, properties purchased after Sept. 11 and through Sept. 10, 2004, will be allowed to depreciate 30 percent of the leasehold improvements for a second-generation tenant, while special depreciation relief is included for a section immediately abutting the World Trade Center. The goal, Burton said, was to provide short-term incentives to lease up properties in the difficult environment.
“From a real estate standpoint, that is the biggest piece of [H.R. 3090],” Burton said. “It’s not all that we wanted, but it is a good start that will [offer] some immediate stimulus.”
The National Association of Real Estate Investment Trusts also lauded the victory. “We view it as a significant step in the culmination of the industry’s efforts over the past several years to better realign the depreciation of leasehold improvements to economic reality,” said NAREIT spokesman Jay Hyde.
As with groups such as NAREIT, Burton said BOMA will attempt to revisit the leasehold depreciation issue down the road, but he acknowledged that additional changes are not likely in the coming year. Besides the terrorism debate, Burton noted that legislators are facing a limited schedule due to the mid-term elections.
That does not mean that BOMA will shut down, however. Burton said the group has plenty on its plate, with such issues as terrorism insurance requiring input from real estate associations everywhere.
“The whole world has changed, so our whole lobbying strategy has changed as well,” said Burton. “We have certainly not run out of things to do.”
Facing Reality
Hyde said NAREIT is also accepting reality that tax relief is not in the offing in 2002. Interestingly, the only tax-related measure that has been resolved of late does not have the support of many in the real estate industry, including BOMA, NAREIT and the International Council of Shopping Centers. Over their objections, Bush has provided a two-year ban on taxing goods sold over the Internet, extending a moratorium that has been in place for the past three years. While philosophically opposed to most taxes, BOMA and others maintain that retailers located in malls and other physical spaces will be at a disadvantage if their sales are taxed and those on the Internet are not.
“It has been a major concern of ours for some time,” said Burton. “It clearly is a disadvantage to our retail customers in a lot of our buildings.”
BOMA and members of the e-Fairness Coalition had been lobbying aggressively to keep Congress from extending the ban, but the decision by Bush has made it “a dead issue” for the time being, said Burton. In the interim, BOMA is working to quantify the financial impact such a ban could have on real estate so it will have the data available when the next extension runs out.
Besides the real fallout already experienced, the Sept. 11 attacks do seem to have disrupted the real estate sector’s momentum on tax issues. The depreciation debate had been progressing steadily prior to the incidents. Until being quashed in the late going, an effort by House Ways and Means Chair Bill Thomas had the leasehold depreciation schedule whittled down from its current 39 years to 15 years. BOMA estimated that such relief would have provided savings of $1.87 billion during the next five years and $7.1 billion over 10 years.
There had also been impressive steps taken on capital gains tax relief, long on the wish list of the commercial real estate industry. Under current law, the maximum tax rate on capital gains is 20 percent for assets held at least one year and 10 percent for taxpayers in the lower, 15-percent tax break. If the assets are held for at least five years, the rate is reduced to 18 percent for the higher bracket and 8 percent for lower level.
Real estate interests had been optimistic as recently as this fall that the capital gains debate would be addressed via a measure that would cut the five-year holding pattern to one year. That would effectively mean a capital gains cut for many taxpayers. Unfortunately, the proposal was kicked out of H.R. 3090 in the waning moments.