3 Tax Issues to Watch
Tax-deduction extensions will affect commercial real estate in the coming year
By Richard D. Purtell, chairman and chief elected officer, Building Owners and Managers Association International
This past October, the commercial real estate industry
achieved victory on three of its
key tax issues when Congress passed an
“extenders” package. The package, comprising tax breaks that Congress voted to
extend upon their expiration, was part of
the Emergency Economic Stabilization Act
of 2008, signed into law this past Oct. 3.
It includes retroactive, two-year extensions of the 15-year depreciation timeline
for leasehold improvements and of the
tax deduction for brownfield-remediation
costs, as well as a five-year extension on
the tax deduction for energy-efficient commercial buildings.
Here’s what commercial brokers should
know about the three issues and how they
affect their commercial mortgage clients.
1. Leasehold depreciation: Before
2004, tenant or leasehold improvements
depreciated at an annual rate of 1/39. In
an effort to better reflect the marketplace,
Congress passed legislation in 2004 to reduce the depreciation timeline to 15 years.
This legislation expired on Dec. 31, 2007, but
the recent tax-extenders package extends
the deadline through this coming Dec. 31.
Brokers should be aware of how this
benefits their commercial clients, who
could find themselves with more funds.
Leasehold improvements include changes
to walls, floors, ceilings, lighting and
plumbing to meet new- or existing-tenant
needs. Because the average commercial
real estate lease is from five to 10 years,
such reconfigurations are common.
2. Brownfield-remediation tax incentive:
Cleaning up and redeveloping brownfield
properties encourages urban development
and job growth, but it can be expensive
for your investor and developer clients.
Richard D. Purtell is chairman and chief elected officer of the Building Owners
and Managers Association (BOMA) International. Purtell also is portfolio manager
for Grubb & Ellis Management Services Inc. BOMA International and its real estate
partners actively worked to educate Congress (2007-’08) about how certain tax
policies favorably impact the real estate industry, create jobs and stimulate the
economy. Reach Purtell at email@example.com.
Because brownfields are real property, the
presence or potential presence of a hazardous substance, pollutant or contaminant
may complicate their expansion, redevelopment or reuse.
Tax incentives to encourage the brown-field-site redevelopment expired on Dec. 3 1,
2007, but the financial-rescue package extends this through this coming Dec. 31.
3. Energy-efficient commercial buildings: The Energy Policy Act of 2005 included a tax deduction for energy-efficient
upgrades to commercial buildings. With
the recent extension, the law now applies
to energy-efficiency upgrades made from
Jan. 1, 2006, through Dec. 31, 2013. Brokers
should be aware that this legislation covers
several commercial building types, including offices, retail and rental housing.
The bill provides for an accelerated deduction of as much as $1.80 per square foot
for energy-efficient upgrades that achieve a
50-percent reduction in annual energy costs
to users, compared to a base building defined by American Society of Heating, Refrigerating and Air-Conditioning Engineers
standards. Partial credit of as much as $0.60
per square foot also is available for upgrades
to each of a building’s three energy-using
subsystems: lighting; heating, cooling, ventilation and water-heating systems; and the
Despite favorable outcomes on these
three issues, some legislative challenges
remain for the commercial real estate industry. For instance, capital-gains taxes
likely will be on the table this year. The
incoming administration has been expected to increase the maximum rate on
capital gains and qualified dividends from
the current 15 percent to as much as 25
percent. Given the state of the economy,
however, this may be on hold.
That said, without congressional action, the current 15-percent rate, which
expires at the end of 2010, will revert to 20
percent. This may benefit small businesses
and startups because their capital-gains-tax rate could be cut to zero.
Collectively, the real estate industry
represents more than 2 million voters, 20
percent of the gross domestic product,
$300 billion in federal tax revenues annually and 70 percent of local-government tax
revenues. Industry professionals must work
together to educate legislators on issues affecting the industry, including ways it can
help stimulate the overall economy.