LEGISLATIVE AFFAIRS: Key Real Estate Tax Provisions Extended in Victory for Realtors
Philip Weiden | January 2016
The House and the Senate passed a tax extender package that extended Mortgage Debt Relief through the end of 2016. Mortgage debt relief will keep homes from turning into foreclosures when a seller takes a loss on the property. This will allow them to avoid paying taxes, which if not enacted would force many into foreclosure. Mortgage premium deductibility was also been extended through 2016.
The expensing provision for equipment and certain real estate used by small and mid-sized businesses was made permanent (section 179). This real estate includes leasehold improvements, certain restaurant improvements, and certain retail improvements. Moreover, the $250,000 cap on this qualified real estate, which is half that of personal property, is being removed starting in 2016, so all business assets (real and personal) will have the same $500,000 limit each year, indexed for future inflation.
Bonus Depreciation has been extended for five years. The provision now includes a new category called “Qualified Improvement Property,” which is defined as an improvement to the interior portion of an existing non-residential commercial building (except for elevators, escalators, or enlargements). Thus, most leasehold improvements will now generally be eligible for immediate expensing for the smaller and mid-size businesses and for bonus depreciation (50% expensing) for the bigger companies. The Charitable Deduction, the expired provision that gives a charitable deduction for contribution of real property for conservation purposes, was made permanent.
The Foreign Investment in Real Property Tax Act (FIRPTA)
The bill includes two significant IRPTA provisions. The first allows overseas investors to own up to 10% of a publicly-traded U.S. REIT up from 5%. The second provision allows foreign pension funds to own U.S. real property interests without triggering FIRPTA withholding tax. These changes are estimated to bring billions of dollars of foreign investment into the U.S. commercial real estate market. The expired energy tax credit for new homes will be extended for two years through 2016. This credit ranges from $1,000 to $2,000.
Business also did well in this deal. The Internet Tax Freedom Act, which bans state and local government from imposing taxes on Internet access, expired October 1, 2015. The ban has now been extended through October 1, 2016.
The 15-year depreciation period for leasehold improvements has been extended permanently. The Energy Efficient Commercial Buildings section 179D has been extended through 2016. This is a commercial buildings’ tax deduction.
The new laws also explicitly prohibit the sale, transfer and liquidation of the treasury department’s senior preferred stock holdings in the Government Sponsored Entities without legislative action, which sunsets January 1, 2018. The Mortgage Servicing Asset Study provides funding for a federal government study of the appropriate capital requirement for mortgage servicing assets. The study will examine the effects of Basel III and the National Credit Union Administration’s capital requirement on mortgage serving assets.
The existing ban on the HAWK (Homeowners Armed With Knowledge) program continues, which would have allowed homeowners to participate in housing counseling and receive a reduction in their mortgage insurance premiums.
The eminent domain seizure of mortgages is prohibited, which means that the FHA and Ginnie Mae cannot insure or securitize a loan on a home that has been seized through eminent domain. This mirrors a policy of the GSE’s designed to eliminate the local practice of seizing mortgages via eminent domain authority in order to prevent foreclosure. Finally the National Flood Insurance program will maintain funding levels for the national flood insurance program and homeowner’s advocate, with small increases for flood mapping and mitigation services.