Learn how new laws could affect real estate decisions.
wee hours of Jan. 1, 2013, Congress passed the American Taxpayer Relief Act of
2012 and the tax changes that resulted will drastically alter the way
commercial real estate professionals plan for major transactions. Additionally,
tax provisions written into the Patient Protection and Affordable Care Act,
which went into effect Jan. 1, 2013, will affect some taxpayers’ real estate
decisions. This synopsis focuses on the impact of ATRA and the Affordable Care
Act on real estate-related tax issues.
taxpayers, ATRA makes permanent the individual income tax brackets and capital
gains and dividends rates that were previously in place. Ordinary income tax
rates remain the same and the tax rate on capital gains and dividends for most
taxpayers stays at 15 percent.
and married couples with adjusted gross incomes greater than $400,000 and
$450,000 respectively will be subject to a top marginal rate of 39.6 percent on
ordinary income and 20 percent tax rate on capital gains and dividends.
business standpoint, ATRA extends several popular tax breaks that relate to
real estate, most notably, the 50 percent bonus depreciation allowance under
Internal Revenue Code Section 168(k) for qualified property acquired and placed
in service prior to Jan. 1, 2014 (Jan. 1, 2015, for certain longer-lived and
transportation property). Qualified property is generally defined as new
property with a useful life of less than 20 years, computer software, water
utility property, or qualified leasehold improvement property.
also revives the rule treating qualified leasehold improvements as 15-year
property, thus making such property eligible for bonus depreciation. Consult
with a certified public accountant or other tax professional for questions
regarding what property falls within the Internal Revenue Service’s definition
of qualified leasehold improvements.
Qualified Leasehold Improvements
leasehold improvements are depreciated over a 15-year life and are eligible for
50 percent bonus depreciation. Qualified leasehold improvements are defined as
any improvement to an interior portion of a building that is nonresidential
real property if the improvement is made pursuant to a lease (generally) by the
lessee (or any sublessee), and the improvement is placed in service more than
three years after the date the building was first placed in service. Certain
improvements are not included, such as any improvement that enlarges the
building, adds an elevator or escalator,or adds any structural component
benefiting a common area or the internal structural framework of the building.
This can be a significant benefit to landlords making improvements under
Section 179 Expensing
retroactively increases IRC Section 179 maximum expensing amounts for 2012 from
$139,000 to $500,000. Effective for 2013, ATRA increases the Section 179
maximum expensing amount from $25,000 to $500,000. After 2013, the maximum
expensing amount is again scheduled to drop to $25,000. This opens a window of
opportunity for substantial write-offs during 2013 for certain equipment
associated with the development of real estate.
expansion of benefits under Section 179 is good news for businesses and
individuals who invest in personal property. However, Section 179 applies only
to personal property and qualified real property, such as qualified leasehold
improvements, qualified restaurant property, and qualified retail improvement
properties. Additionally, Section 179 is limited in the case of luxury autos
and some SUVs. Another limitation of Section 179 is that it is not allowed on
leased property except in very limited instances.
AMT Amounts Permanent
the most significant effect ATRA has in regard to the 2012 tax year is that
ATRA increases the Alternative Minimum Tax exemptions for all taxpayers on a
permanent basis. Previously, Congress would “patch” the AMT problem every year
by increasing the AMT exemption for that tax year only. This permanent change
will prevent many taxpayers from owing additional tax with their 2012 income
tax returns. For 2012, the AMT exemption amount increases from $33,750 to
$50,600 for single taxpayers, $45,000 to $78,750 for taxpayers married filing
joint returns, and $22,500 to $39,375 for married taxpayers filing separate
returns. Going forward, the AMT exemption amounts will be adjusted annually for
Medicare Contribution Tax
3.8 percent tax imposed by the Affordable Care Act took effect Jan. 1, 2013.
This tax applies to taxpayers with AGIs greater than $200,000 if single and
$250,000 if married. The tax is imposed on the lesser of the net investment
income or the amount of AGI over the threshold limit. Net investment income
includes interest income, dividends, rental income, and capital gains on the
sale of property, among other types of passive income.
the gain on sale of trade or business assets does not qualify as net investment
income. Thus, if a taxpayer is actively involved in a trade or business that is
sold, the gain on the sale of the business (even if some of the gain is
capital) is not subject to the 3.8 percent on investment income. As such,
rental income is not considered net investment income if the rents are earned
as part of a trade or business activity, and if the taxpayer actively
participates in the activity.
that most of these changes affect the 2013 tax year and will not be reflected
in this year’s return for 2012. However, some of the “permanent” changes
enacted by ATRA are not necessarily permanent if Congress decides to overhaul
the entire tax code this year. Given the ongoing fiscal discussions, more changes
affecting taxpayers could materialize later this year.
Shelly B. LaGroue, CPA, is
a member of the certified public accounting firm Forwood & LaGroue in
Mobile, Ala. Contact her at email@example.com. C. William Barnhill,
CCIM, is president of Omega Properties in Mobile. Contact him at firstname.lastname@example.org.
article is designed to provide information in regard to the subject matter and
should not be considered accounting, tax, or legal advice.