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Tax Extension Keeps Real Estate Status Quo

By Robert Freedman, Senior Editor, REALTOR® Magazine

The law enacted by President Obama last week to extend the tax cuts of President George W. Bush includes a number of provisions of importance to real estate, but it also leaves out at least one provision NAR opposes. In short, it’s largely a continuation of the status quo for the near future. The one potential drawback is in its cost.

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President Obama signs tax extension bill. White House photo

Since it’s not paid for with any program cuts, it stands to put upward pressure on interest rates in the future and could lead to more pressure on lawmakers to find ways to cut the federal deficit, which in turn could make tempting targets out of the mortgage interest deduction and other programs through which the federal government has historically shown its support of home ownership.

On the plus side, the law leaves out a proposal that’s been talked about for close to two years now, and that’s to tax as ordinary income rather than as capital gains the carried interest of general partners in investment partnerships. That proposal, which is targeted at hedge fund managers, would hurt real estate investment partnerships disproportionately, because the vast majority of investment partnerships are for real estate, and NAR has opposed it. So, that issue is neutralized for now.

In general, the law keeps in place existing tax brackets (which go from 10 percent on the low side to 35 percent on the high side) and the existing capital gains rate, which will remain at 15 percent. Depreciation recapture tax rates remain at 25 percent. No new limitations are created for Section 1031 like-kind exchanges. And the existing 15-year cost recovery period for leasehold improvements is retained. Same with existing bonus depreciation treatment: assets with a cost recovery period of 20 years or less are eligible for 100 percent depreciation in the year the assets are placed in service. This rule applies to all assets placed in service on or after Sept. 8, 2010, and before January 1, 2012. Eligible assets placed in service during 2010 will qualify for a 50 percent bonus depreciation allowance.

You can get more details on these provisions in an initial analysis by NAR Government Affairs on REALTOR.org.

Other provisions of note:

  • A one-year payroll/self-employment tax holiday (slightly lower tax rates for the 2011 tax year)
  • A return to estate tax rules as of Jan. 1, 2010, with an exclusion of $5 million ($10 million for a couple) and a maximum rate of 35 percent
  • Extension of the alternative minimum tax (AMT) “patch”—that is, exemptions for middle-income households that would otherwise be at risk of getting hit with AMT
  • Tax credits for new-home builders for homes that meet energy efficiency standards and for manufacturers of energy efficient appliances. There are also tax credits for existing home owners who make energy efficiency upgrades
  • There’s also an extension of the mortgage insurance (MI) deduction, which phases out for individuals whose annual income is between $100,000 and $110,000

Read the full analysis on REALTOR.org.

Disclaimer: This is just a summary of some complex provisions. You would want to consult with your accountant or tax adviser on these or any other tax issues that affect you.

Robert Freedman

Robert Freedman is manager of multimedia communications for the NATIONAL ASSOCIATION OF REALTORS®. He can be reached at rfreedman@realtors.org.

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