Rep. Camp’s Tax Reform Proposal Would Impact Real Estate Industry– February 27, 2014 by Dave Sobochan

The real estate industry should take notice. Representative Dave Camp released the proposed Tax Reform Bill of 2014. If enacted, this bill would create sweeping changes to the tax landscape, particularly as it relates to real estate businesses. Below is a summary of some of the proposed changes.

  • Personal income tax brackets. These would change from the current seven tax brackets — 10, 15, 25, 28, 33, 35 and 39.6% — to three — 10, 25 and 35%. The proposed 35% rate would be composed of the 25% rate and an additional 10% tax on modified adjusted gross income in excess of $450,000 for joint filers and $400,000 for all other filers. The 35% bracket would not apply to qualified domestic manufacturing income.
  • Corporate tax rates. These would gradually decrease from the current rate of 35% down to 25% by 2019.
  • Capital gains rates. The maximum individual capital gains rates would be 24.8% (21% tax rate plus the 3.8% net investment income tax rate).
  • Depreciation. The proposal would repeal MACRS and subject depreciable property to the Alternative Depreciation System (straight-line system) for property placed into service after 2016. Both residential and nonresidential property would have a useful life of 40 years under this system.
  • Section 179. The proposal provides that the maximum amount a taxpayer may expense, for taxable years beginning after 2013, would be $250,000 of the cost of qualifying property placed in service for the taxable year. The $250,000 amount is reduced (but not below zero) by the amount by which the cost of qualifying property placed in service during the taxable year exceeds $800,000. The $250,000 and $800,000 amounts are indexed for inflation for taxable years beginning after 2014. The proposal also makes permanent the treatment of qualified real property as eligible section 179 property.
  • Depreciation recapture (real estate). Depreciation deductions on real property after January 1, 2015, would be recaptured at ordinary income rates.
  • Qualified environmental remediation expenses. These would be required to be capitalized and amortized over 40 years. Under current law, these expenses are capitalized to the cost of the land. Under pre-2013 tax law, the expenses were deductible.
  • Tax-basis adjustments. Tax-basis adjustments under Section 754 due to a death or transfer of a partnership interest would be mandatory. Currently these adjustments are optional in most cases.

In addition, the following items would be repealed under the proposed bill:

  • 179D deduction for commercial energy efficient property
  • Domestic Production Activities Deduction (available to construction/architecture/engineering industries)
  • Like-kind exchanges
  • Historic tax credit
  • Work Opportunity Tax Credit
  • Alternative minimum tax
  • Bonus depreciation
  • 15-year depreciable lives for qualified leasehold, restaurant, retail improvements

Regardless of the fate of this proposal, it is significant in that it could very well serve as the starting point for the massive tax reform process on the horizon. We will continue to monitor significant proposals as they are released.

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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.