Outlook for Real Estate’s Tax Issues Uncertain

July 20, 2005

The 109th Congress got off to a fast start, and several of the key issues on real estate’s agenda have already seen action. To begin the year, tort reform legislation passed both the House and Senate and was signed into law by President Bush. Soon after, the House of Representatives passed an energy bill and the Senate was wrapping up its work on energy legislation. Transportation reauthorization legislation was cleared by both chambers this spring and a conference committee is expected to finalize a bill to send to the President in early summer.

Despite these accomplishments, similar successes may not be forthcoming on real estate’s tax issues any time soon. Though tax issues were widely focused on during the elections last fall and action was promised early in the session, other pressing issues (such as Social Security reform) seem to have captured the spotlight: All the more reason for real estate to band together, activate the grassroots, and get to work.

Over the past 2 years, BOMA Intl. has had two significant tax victories. However, both of the favorable tax changes were temporary and will soon expire. In 2003, in order to boost the faltering U.S. economy, President Bush signed into law a stimulus package that reduced the capital gains rate from 20 percent to 15 percent through 2008. Last year, the American Jobs Creation Act of 2004 reduced the depreciation period for leasehold improvements from 39 years to 15 years for improvements put into place through the end of 2005.

The positive aspect in all of this is the recognition and willingness that Congress has shown to fix a problem that runs counter to the realities of the marketplace and recognize that real estate is a catalyst to boost the economy. It seems that real estate’s arguments may finally be sinking in. Now, it is up to all of us to ensure that these favorable changes are made permanent.

The problem that real estate advocates and elected officials encounter is the fact that budget constraints prevent lawmakers from passing a number of substantial permanent tax cuts. This was the case in last year’s legislation. It wasn’t politically feasible to extend the depreciation schedule beyond 2005. With rising tax receipts and reduced deficit predictions, this year’s climate may be more favorable to passing a permanent extension of the reduced depreciation period. Congressman E. Clay Shaw Jr. (R-FL) and Senator Kent Conrad (D-ND) have introduced legislation in their respective chambers that would permanently extend the 15-year depreciation schedule.

Legislation has also been introduced in the House that would permanently extend the 15-percent capital gains rate and reduce the depreciation recapture rate to 15 percent, aligning it with capital gains. The bill (HR 1500) is sponsored by Rep. David Dreier (R-CA), chairman of the House Rules Committee. Under current law, the capital gains rate is scheduled to revert to 20 percent at the end of 2008 and, as a cost-savings measure, the depreciation recapture rate will continue at a 25-percent rate. Although it is unlikely that these bills will pass as standalone legislation, the increased support in Washington may mean the proposals could be included in a larger tax package that would provide tax cuts for a number of businesses and individuals.

Another tax incentive for buildings that BOMA would like to see enacted this year is the proposed Fire Sprinkler Incentive Act of 2005. The House bill, HR 1131, was introduced by Representatives Curt Weldon (R-PA) and James Langevin (D-RI); the Senate bill, S. 512, was introduced by Senators Rick Santorum (R-PA) and John Rockefeller (D-WV). Both bills are identical and will allow building owners to expense the installation of sprinklers over 5 years, as opposed to the current 39 years.

According to the National Fire Sprinkler Association (NFSA), fire sprinkler retrofit is very labor-intensive, with the average percentage of labor costs estimated at 65 percent. NFSA also estimates that the average cost of retrofitting a fire sprinkler system in an existing high-rise can range from $2 to $3 per square foot depending on the area of the country. A tax incentive would provide some encouragement to overcome this cost impediment while providing an added measure for public safety.

BOMA has sent letters to the principal cosponsors in both the House and Senate indicating that BOMA Intl. is fully supporting the Fire Sprinkler Incentive Act of 2005. BOMA also supported enactment of the Fire Sprinkler Incentive Act when it was introduced in the last session of Congress.

To join BOMA in championing these important tax measures, take a few moments to e-mail your members of Congress and request their support. An easy way to do this is through BOMA Intl.’s Legislative Action Center (http://www.boma.org/Advocacy). Let your voice be heard!

For more information on the issues discussed in this column, visit (www.boma.org) or call (202) 408-2662.

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