09 Sep Tax Changes Rental Property
2013 FEDERAL TAX CHANGES AND IMPACT ON COMMERCIAL REAL ESTATE
By Wolf Baschung, CCIM, CPM
2013 tax changes rental property? What changes you make ask. CCIM Institute provides relevant legislative news and supporting resources to answer questions and protect members’ businesses. Federal, state, and local laws impact the typical commercial real estate practitioner on a daily basis. CCIM’s legislative staff work to ensure members have access to current information for reliable reference and quick understanding.[1] The following is a compilation of recent changes in Federal Tax laws that impact commercial real estate, courtesy of CCIM Institute. This list succinctly presents the most relevant changes that impact our business as investors, Commercial Real Estate (CRE) practitioners, accountants, property owners, managers, and anyone else involved in the commercial real estate industry.
Capital Gains/Carried Interest
- The capital gains/carried interest rate will increase to a maximum of 20 percent of the gains for individuals with an adjusted gross income more than $400,000 and married couples with Adjusted Gross Income (AGI) more than $450,000. Proposed legislation to treat carried interest as Ordinary Income is being debated and may be enacted by the Obama administration, but has not yet come into being.
- Tax changes rental property impact: Current maximum 15% rate will go up to between 15% and 20% depending on AGI level.
3.8 Percent Healthcare Tax
- Passed under the Affordable Care Act in 2010, the 3.8 percent healthcare tax will affect some real estate transactions. Individuals with AGI more than $200,000 and married couples with AGI more than $250,000 may be subject to the3.8 percent healthcare tax.
- Tax changes rental property impact: This change may require investors in real estate to pay a higher ordinary income tax rate on taxable income from operations during years of ownership. It will also impact the after tax deductions from paying points and other loan costs associated with financing. The higher the marginal tax rate, the more valuable these deductions become.
Deductions
- Individuals with AGI more than $250,000 and couples with AGI more than $300,000 should expect a phase out of the personal exemption of $3,800 and itemized deduction write-offs. Direction on the “Pease” provision was included in the fiscal deal (“Pease” is named after Congressman Don Pease (OH) who created an itemized deduction phase out in 1990). The itemized deduction phase out was avoided with the recession and Bush-era tax cuts. As clarified by the fiscal deal, the “Pease” provision will now eliminate up to 80 percent of deductibles for $300,000 AGI couples or $250,000 AGI individuals including charitable donations and mortgage interest.
- Tax changes rental property impact: Affects ordinary income in years of operations of a piece of real estate. Matters in same way as health care tax. This change is similar to the personal healthcare tax in that it may require investors in real estate to pay a higher ordinary income tax rate on taxable income from operations during years of ownership.
Estate and Gift Tax
- Estate or gift taxes will be taxed at or above the $5 million (per person) level but the tax rate will increase from 35 percent to 40 percent in 2013.
Leasehold Improvements
- There is a 15-year straight-line cost recovery for qualified leasehold improvements on commercial properties that extends through 2013 and is retroactive for 2012.
Income Tax Rates
- Individuals with AGI over $400,000 and married couples with AGI over $450,000 will be taxed at a new tax rate of 39.6 percent. For incomes below, the Bush-era tax rates of 10, 15, 25, 28, 33, and 35 percent became permanent.
Cost Recovery and Recapture of Cost Recovery
- The fiscal cliff negotiations did not produce changes to federal tax policies on depreciation recapture or passive loss. Recapture of cost recovery will continue to be taxed at a maximum 25% rate.
Closing Note
- On January 3, 2013, the Internal Revenue Service released a guide on new federal tax rates, Updated Withholding Guidance for 2013 (PDF). Review the IRS notice.
Legislation:
- The following is a table of the progressive rates of the new legislation:
Rate Single Filers Married Joint Filers Head of Household Filers
10% $0 to $8,925 $0 to $17,850 $0 to $12,750
15% $8,925 to $36,250 $17,850 to $72,500 $12,750 to $48,600
25% $36,250 to $87,850 $72,500 to $146,400 $48,600 to$125,450
28% $87850 to $183,250 $146,400 to $223,050 $125,450 to $203,150
33% $183,250 to$398,350 $223,050 to $398,350 $203,150 to $398,350
35% $398,350 to $400,000 $398,350 to $450,000 $398,350 to $425,000
39.60% $400,000 and up $450,000 and up $425,000 and up
Closing Note
- Source: Forbes 1/5/2013