Real Estate Roundtable Highlights Impact of Tax Act – January 11, 2013 by Adam Hill

Another year and another successful Real Estate Roundtable held for our clients yesterday at the Cleveland Marriott East. The program covered IRS repair regulations, a panel discussion of leading industry professionals on tax credit structuring as a result of the historic Boardwalk Hall case, and key provisions of the American Taxpayer Relief Act of 2012. (View the full presentation.) Below are a few of the highlights from the Tax Act and their potential impact:

Notable Business Tax Extenders

  • 15 year straight-line cost recovery for qualified leasehold improvements, qualified restaurant buildings and improvements, and qualified retail improvements

  • Increased expensing limitations and treatment of certain real property as section 179 property

  • Extension and modification of bonus depreciation

  • Extension and modification of research credit

  • Extension of new markets tax credit ($3.5B for 2012 and 2013)

  • Basis adjustment to stock of S corporations making charitable contributions of property

  • Reduction in S Corporation recognition period for built-in gains tax

  • Environmental remediation costs are no longer eligible to be expensed as of 12/31/11

Takeaways: The qualified leasehold improvement property extension will benefit real estate owners investing in tenant build-outs in 2013. Combined with bonus depreciation, the extension provides significant and immediate opportunities for deductions that otherwise would be taken over a 39-year period.

Bonus Depreciation

  • Extension of 50% bonus depreciation through 2013

Takeaways: To be eligible for bonus depreciation, the asset must be new and be tangible property with a recovery period of 20 years or lessor qualified leasehold improvement property.

Section 179 Depreciation

  • Extension of section 179 depreciation limit at $500,000, with a phase-out “in service” limit of $2 million

Takeaways: For contractors, this is an excellent opportunity for use with machinery, equipment, etc. Also keep in mind that Section 179 property can be new or used and is subject to taxable income limitations.

Conservation Property

  • Qualified Conservation Property – Deduction is limited to 50% of taxpayer’s contribution base (carryover is limited to 15 years)

  • Special rule for conservation property was extended to 12/31/13 (originally set to expire on 12/31/2011)

Takeaways: The provisions in the Act allow taxpayers to deduct more of their conservation property contributions in 2013. Adding a conservation easement to a historic rehab project could help move along a stalled project.

Notable Energy Tax Extenders

  • Credit for energy-efficient existing homes

  • Credit for energy-efficient new homes

  • Credit for energy-efficient appliances

  • Credits with respect to facilities producing energy from certain renewable resources

– One year extension on credits for wind-power facilities, now through 1/1/14
– One year extension for open and closed loop biomass facilities, now for facilities that have begun construction before 1/1/14
– One year extension for IRC section 45 property to be claimed through IRC section 48

Takeaways: If you are planning on making energy improvements to your home, you may be able to offset some of the cost. The wind industry also should get a boost with the one-year extension of the investment tax credit for wind deals.

It’s also important to note that the Patient Protection and Affordable Care Act, or health care reform, also created the 3.8% Net Investment Income Tax (NIIT). Effective January 1 of this year, the tax applies to investment income such as rents and other income from passive business activities. Rental activity may, however, be considered active, and therefore not subject to the tax, if you qualify for and elect real estate professional status. Learn more about the NIIT.

Contact Adam Hill at ahill@cohencpa.com for more information.

This communication is for information only, and any action should only be taken after a detailed review of the specific situation and appropriate consultation.

Notwithstanding that these materials do not constitute legal, accounting or other professional advice, as may be required by United States Treasury Regulations and IRS Circular 230, you should be advised that these materials are not intended or written to be used, and cannot be used by you or any other person, for the purpose of avoiding penalties that may be imposed under federal tax laws. No written statement contained in these materials may be used by any person to support the promotion or marketing of or to recommend any federal tax transaction(s) or matter(s) addressed in these materials, and any taxpayer should seek advice based on the taxpayer's particular circumstances from an independent tax advisor with respect to any such federal tax transaction matter.