By Gary Krupa, CPA
(March 1, 2013)
Several provisions of the American Taxpayer Relief Act of 2012 (ATRA), or the so-called “fiscal cliff” legislation, should have the effect of stimulating investment in commercial real estate. The Act took effect on January 1, 2013. This article describes the provisions of the law as well as how it can affect real estate entities and transactions. In addition, a new 3.8% Medicare tax on investment income took effect on January 1, 2013. The tax is described below.
This is a short version of the article. The complete version can be found at
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Sales and exchanges of property
Capital gains
These provisions apply for tax years beginning after December 31, 2012.
The top tax rate for long-term capital gains has increased from 15% to 20% for taxpayers with taxable income over $400,000 if single, $450,000 if married filing jointly, and $425,000 for heads of households.
For joint filers with taxable income below $72,500, and single filers with taxable income below $36,250, the tax rate for long-term capital gains and dividends is zero percent.
Long-term capital gain rates apply if an asset has been held for more than one year.
The 25 percent tax rate remains unchanged from 2012 for sales of un-recaptured code section 1250 property.
Short-term capital gains will still be taxed at ordinary income rates.
The capital gain portion of installment payments received after 2012 is subject to the tax rates for the year of payment, not the year of the sale.
Depreciation of real property
Section 179 deduction
The code section 179 dollar limit for tax years 2012 and 2013 is $500,000 with a $2 million investment limit (that is, the limit is reduced by the amount by which the cost of section 179 property placed in service during the tax year exceeds $2 million). The $500,000 dollar limit is thus an extension of the previous limit. The ATRA has postponed the scheduled decrease to a $25,000 dollar limit with a $200,000 investment limit until 2014 and later.
Code section 179 allows you to write off a certain amount of the cost of qualified property that has been purchased, for the year that such property is placed in service.
However, you can only elect to write off up to $250,000 of the total cost of qualified real property placed in service, of the maximum section 179 deduction of $500,000, in 2012 or 2013.
“Qualified real property” includes:
(a) qualified leasehold improvement property
(b) qualified restaurant property
(c) qualified retail improvement property
other than property used for lodging purposes, as in a hotel, or real property leased to others, unless two tests are met as described in IRS publication 946.
The expensing option for real property is limited to 2012 and 2013 so you must act quickly. Act now to determine if you should undertake renovations on your property. Limitations on the carry-over of unused election amounts make planning and forecasting essential. Because the rules surrounding the qualifications and interplay of deductions can be very tricky, it’s advisable to work with an accountant to make sure you maximize your savings while minimizing any risks.
Bonus depreciation
“Bonus depreciation” is referred to as the “Special Depreciation Allowance” by the IRS. Prior to 2013, the amount of additional depreciation you could take on an asset’s cost was either 100% or 50% of the cost, depending on the type of property and when it was acquired and placed in service. The 50% of cost provision has been extended by the ATRA until December 31, 2013. That is, the property had to be acquired after December 31, 2007, and placed in service before January 1, 2014.
Accelerated depreciation
The ATRA extends through 2013 the 15-year recovery period for qualified leasehold improvements, qualified retail improvements, and qualified restaurant property, all of which are defined above.
Low-income Housing Tax Credits
The credit has been extended to December 31, 2013.
Charitable donations of property by S Corporations
The ATRA has extended the ability of S Corporation shareholders to deduct the fair market value of property the S Corporation donated to a charity. Prior to 2006, the deduction was limited to the basis of their stock.
Reduced recognition period for S Corporation built-in gains tax
The ATRA reduced the holding period for appreciated assets to 5 years for tax years beginning in 2012 and 2013. The 10-year period will again apply beginning in 2014. Therefore, if your S corporation has been in existence less than 7 years at the beginning of 2011, you should sell any appreciated assets during 2011-2013 (assuming you plan on selling them), otherwise, you may be subject to the built-in gains tax in 2014.
Medicare Tax on Investment Income
A 3.8% tax is imposed on the lesser of the taxpayer’s net investment income for the year, or the amount by which the taxpayer’s modified AGI exceeds a threshold amount listed below. Net investment income includes income from passive sources like interest, dividends, annuities, royalties and rents, and net gain from the disposition of property. Income from a trade or business that is a passive activity to the taxpayer is included in investment income.
The threshold amounts are:
$200,000 for unmarried taxpayers;
$250,0000 for joint filers.
New Markets Tax Credit
This credit was scheduled to expire after 2011 and has been extended to December 31, 2013.
This credit is offered as an incentive to provide investments in businesses located in low-income communities across the country. Most investments to date have been for real estate projects. The awards to Community Development Entities (CDEs) for 2012 are expected to be announced by the spring of 2013. The CDEs receiving awards will then sell credits to investors and make loans to or investments in “qualified active low-income community businesses.” Developers and owners of non-residential real property can qualify for such loans or investments.
For non-residential real property located on Indian reservations, the accelerated depreciation provision has been extended through December 31, 2013. It was scheduled to expire after 2011. The recovery period is 22 years as compared with 39 years for non-residential real property in general.
Gary Krupa – http://garykrupacpa.com
Born in Flushing, NY. Lived on Long Island in New York from 1955 to 1994. Lived in Sedona, Arizona from 1995 to 1997. Lived in Ventura, California from 1997 to 2008. Lived in Rimrock, Arizona from 2008 to Present. CPA, writer and musician. I play the accordion professionally. I speak French. Married with two cats. My wife and I own a house in Rimrock.
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