Legal victory for the apartment industry: low taxes
December 1, 2010
Tax Bill Passes, No Carried Interest Tax Increase, 1099 Repeal Fails
The House of Representatives passed legislation (H.R. 4853) extending the Bush-era tax cuts for two years. Since the House did not make any changes to the version that passed the Senate on December 15, the measure now goes to President Obama for his signature.
The deal includes several tax items of interest to apartment firms. In a key victory for our industry, the package will not be paid for with an increase in carried interest taxation. It will continue to be taxed at 15 percent capital gains tax rates instead of higher income tax rates as some have proposed. NMHC/NAA will remain vigilant on this issue as the threat of a potential tax increase will continue into the new Congress since there are few significant revenue raisers left to pay for Congressional spending proposals.
The measure includes several items of interest to the business community, including the apartment sector. They include:
Capital Gains/Dividend Tax Rates: A scheduled increase in capital gains tax rates from 15 percent to 20 percent and taxing qualified dividends as ordinary income, up to the top rate of 39.6 percent, will not take place. Instead the current 15 percent tax rate will be applied to both for two years.
Bonus Depreciation: The package includes full expensing for plant and equipment for 2011 (retroactive to September 8, 2010), up from 50% bonus depreciation in 2010. Fifty-percent bonus depreciation returns for 2012. This applies to property that is depreciated over twenty or fewer years.
Payroll Tax Credit: The agreement includes a 2 percentage point payroll tax decrease in 2011, reducing employees’ payroll tax rate from 6.2 percent to 4.2 percent.
Two-Year Estate Tax Deal Retains Stepped-Up Basis
The deal includes a two-year solution for the estate tax. Without Congressional action, the estate tax would have reverted to its 2001 levels beginning January1 ($1 million estate exemption, 55 percent tax rate). Under the new law, the estate tax will be set at a $5 million exemption and a 35% tax rate for 2011 and 2012.
Importantly, as NMHC/NAA have urged, inherited commercial real estate assets are expected to be subject to stepped-up basis rules (in contrast to the carryover basis rules that prevail in 2010). That said, for 2010, taxpayers may elect to use 2011 estate tax rules and take advantage of stepped-up basis for inherited assets if they choose not to take advantage of full repeal that comes along with carried over basis.
Although the immediate pressure for Congress to reach an accord on a long-term estate tax has been diminished, it is expected that Congress will continue to debate the issue during the 112th Congress.
Tax Extenders Included, TCEP Extension Omitted
The law extends for two-years, through 2011, numerous expiring tax provisions traditionally termed “tax extenders.” These include the Energy Efficient New Homes Tax Credit, the New Markets Tax Credit (at a pre-American Recovery and Reinvestment Act (ARRA) level of $3.5 billion) and brownfields expensing.
It also renews a program enacted in the stimulus bill (Section 1603) that allows the Treasury to pay cash grants in lieu of energy tax credits. Left out of the package, however, is an extension of the Tax Credit Exchange Program (TCEP), also enacted in the stimulus bill. TCEP allows the Treasury to remit Low-Income Housing Tax Credits in the form of cash.
That said, the bill does extend by one year, through 2011, the placed in service date for GoZone low-income housing credits. In addition, Senator Mary Landrieu (D-LA) has received a commitment to extend the placed-in-service date through 2012 as part of tax legislation that may be considered in the early part of 2011.
1099 Repeal Effort Fails
Efforts to include a repeal of onerous new 1099 reporting requirements enacted in the health care reform law (P.L. 111-148) were unsuccessful.
Starting in 2012, businesses will be required to file a 1099 report to every business from which it purchases more than $600 in goods and services. (Prior law restricted the reporting requirement to the purchase of $600 or more in services only.)
Despite bipartisan agreement that the provision should be repealed, there is no agreement over how it should be paid for. As a result, repeal provisions were not included in the tax bill and is not expected to pass before the lame-duck session adjourns. Lawmakers are expected to take up the issue early in the 112th Congress, and NMHC/NAA will continue to aggressively advocate for repeal.