Congress Passes Critical CRE Tax Legislation


December 17, 2010

Late last night, Congress passed an $859 billion tax bill, which includes provisions that will strengthen commercial real estate and economic recovery. The legislation includes two tax extensions that will greatly affect real estate: the 15 percent tax rate on capital gains through 2012 and the 15–year timeline for depreciating leasehold improvements, retroactive to January 1, 2010 and through December 2011. The bill’s passage comes at a critical time, providing needed tax relief for a still fragile commercial real estate industry.

BOMA International’s advocacy team worked diligently to educate members of Congress about how the legislation would affect commercial real estate. In a December 9 letter to Congress, BOMA explained that “with the commercial real estate sector still grappling with an unprecedented liquidity challenge, now is not the time to increase the cost of investment and operation of commercial properties.” Citing a special report issued by the Congressional Oversight Panel in early 2010, BOMA stated that approximately $1.4 trillion in commercial real estate loans will expire between 2010 and 2014; in nearly half of those cases, the borrower owes more than the underlying property is currently worth.

Leasehold improvements, also known as tenant improvements, include changes to walls, floors, ceilings, lighting and plumbing to meet the needs of a new or existing tenant. With the average commercial real estate lease running from five to ten years, requiring these improvements to be depreciated over a 39 year period—which would have occurred if Congress had not passed the extension of the 15–year timeline—is simply a hidden and inequitable tax on the industry. By extending the 15–year timeline, Congress is helping to free up capital for building owners and add desperately needed jobs to the overall economy. It is estimated that the leasehold depreciation extension will save members of the industry $3.6 billion dollars over ten years.

Extending the current 15 percent capital gains taxes rate will help stimulate prudent investment as well as promote a reasonable expansion of construction activity in the office building industry. The extension will also encourage a range of desirable economic activities: the acquisition and development of commercial properties; lending to finance or refinance investment in those properties; and the employment of skilled workers involved in construction, renovation and remodeling work.

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