Multifamily Industry to Benefit from Tax Deal

By Dees Stribling, Contributing Editor

On a macroeconomic level, the implications of the tax bill passed by Congress and signed by President Obama earlier this month are still being sorted out, but according to the National Multi Housing Council and the National Apartment Association, there were a number of wins for the multifamily industry in the bill. Other matters of concern to the industry not in this bill will likely be taken up by the new Congress, according to the organizations, which represent the multifamily industry in the halls of Congress.

Perhaps the key victory for the industry is that there will be no increase in carried interest taxation. The idea that carried interest should be taxed as regular income, instead of at the lower capital gains tax rate, has been kicking around Congress for some time. Such an increase would have an adverse impact on the incomes of many partnerships, including those commonly used as ownership structures for apartments and other real estate. The increase didn’t make it into the tax bill, so carried interest will continue to be taxed at 15 percent capital gains tax rate.

Forestalling an increase in carried interest tax rates is something of a game of whack-a-mole, however. The NMHC and NAA anticipate that the idea is not dead, and will be revisited eventually. “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 organizations note in a statement on the tax bill.

Another item to be taken up by the next Congress–because it wasn’t ultimately in the tax bill–is the matter of repealing the new 1099 reporting requirements enacted in the healthcare reform law. 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. Currently the reporting requirement is for the purchase of $600 or more in services only.

“The odds that Congress will repeal the 1099 expansion provision in the healthcare bill are extremely high,” Matthew Berger, vice president of tax for NMHC/NAA, tells MHN. “While repeal stalled in 2010 due to disputes over how to offset the cost, there’s widespread agreement among Democrats and Republicans that the provision should be scrapped.”

Especially now that the 2012 effective date is looming closer, Berger adds, “there is a strong likelihood Congress will be able to move forward with repeal. All that said, owners who rent real estate on a so-called passive basis, and do not do so as their primary trade or business, should note that they will have to remit 1099s to non-corporate entities from which they purchase services in excess of $600 beginning in 2011.”

Other benefits of the tax package for the multifamily industry, according to NMHC/NAA, include full expensing for plant and equipment for 2011 (retroactive to September 8, 2010), up from 50 percent bonus depreciation in 2010, with the 50 percent bonus depreciation returning in 2012; an estate tax set at a $5 million exemption and a 35 percent tax rate for 2011 and 2012; and that 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).

The law also extends for two years, through 2011, numerous expiring tax provisions known as “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.