Throughout the past year, CCIM Institute had three top priorities: increase liquidity, prevent burdensome regulations, and create awareness of how federal tax policies impact commercial real estate. Read more.
Federal Tax Policy with Fiscal Cliff Updates
Federal tax code has not substantially changed for over two decades. 2013 brings a new set of rules and guidelines for all U.S. tax payers. Keep in mind that filing for 2013, is not due until April 2014. Individuals, families and businesses across the board (not only higher-income individuals or households) will be to some degree, impacted by federal tax rate changes negotiated through the fiscal cliff deal.
Capital Gains/Carried Interest
The capital gains/carried interest rate will increase to 20 percent for individuals with and adjusted gross income more than $400,000 and married couples with AGI more than $450,000. Individuals/couples below the $400,000/$450,000 AGI level will still pay 15 percent.
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 the 3.8 percent healthcare tax.
In February last year, the payroll tax cut was extended until Dec. 31, 2012. Payroll tax includes Social Security payments that were cut to 4.2 percent instead of 6.2 percent. Without language included in the fiscal cliff deal, the payroll tax reverted back to the pre-recession level, 6.2 percent. It is estimated that the average worker will pay about $1,000 more in taxes annually, or about $42 per pay check.
Alternative Minimum Tax
Under the fiscal cliff deal, the AMT received a permanent fix and will adjust for inflation. The AMT will be less burdensome on lower-income levels with more exemptions for credits or tax deductions whereas higher-income levels will receive less exemption opportunities.
Exemptions and 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.
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.
Businesses may deduct up to 50 percent of expenses (property and equipment), not including real estate for the 2013 tax year.
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
The greatest change will be for individuals with AGI over $400,000 and married couples with AGI over $450,000; a new tax rate of 39.6 percent applies to this income level. For incomes below, the Bush-era tax rates became permanent.
On January 3, 2013 the Internal Revenue Service released a guide on new federal tax rates, Updated Withholding Guidance for 2013. Read more.
The fiscal cliff negotiations did not produce changes to federal tax policies on depreciation recapture or passive loss.
Final Fiscal Cliff Stages
CCIM Institute's summary of the fiscal cliff negotiation stages and final details preventing the U.S. economy from going over the cliff can be reviewed online. Read more.
FASB Lease Accounting Proposed Rules
The Financial Accounting Standards Board’s lease accounting proposal has the potential to reduce the U.S. GDP by $27.5 billion annually and cause a loss of approximately 190,000 U.S. jobs. It is expected that FASB will release more information by April 2013. Read more.
Basel III/Dodd-Frank Act
The Dodd-Frank Act requires federal agencies to protect consumers. Basel III is a proposed rule under Dodd-Frank. Basel III is overly complex and has the potential to hurt local economies. Read more.
Healthcare/Affordable Care Act
Individual Healthcare Mandate
By 2014, the individual mandate upheld by the U.S. Supreme court will go into effect. Read more. CCIMs (and all U.S. citizens) will either continue having coverage through their employer, purchase insurance coverage through a health insurance exchange, or pay a tax penalty. Health Insurance Exchanges will be set up through their state or the federal government. States had to determine by 2012 whether they will create their own exchange or use the exchange the federal government creates.
SBA’s 504 Refinancing Loan Program
The Small Business Administration’s 504 Loan Program provided another refinancing opportunity for small business expansion plans, the program expired in 2012 but Congress is considering extending the program. Read more.
State Tax Policy
Internet Sales Tax
Online retailers put brick and mortar storefronts out of business because there is an unfair advantage when tax season rolls around. Read more.
Friday, January 4, 2013
Wednesday, January 2, 2013
Below is a brief summary of the key provisions of the compromise law which is formally entitled The American Taxpayer Relief Act.
· Income tax rates: Current income tax rates are extended for families earning $450,000 or less and individuals earning $400,000 or less annually. Taxpayers earning more than these thresholds will be taxed at 39.6%, up from 35%.
· Investment tax rates: The top capital gains and dividend rate remain at 15% for those below the $450,000/$400,000 income thresholds, and are increased to 20% for those with incomes above those amounts. Current law remains in place for carried interest.
· Estate tax: The current $5 million per-person estate tax exemption remains (with the $5 million indexed for inflation) but the rate is increased to 40% from the current 35%.
· Tax extenders: Individual and business tax extenders are extended seamlessly through 2013.
· Allows businesses to recover the cost of certain leasehold improvements and restaurant and retail property over a 15-year period, rather than over 39 years
· Bonus depreciation: The 50% bonus depreciation provision is extended for one year.
· The Research and Development (R&D) tax credit was extended through 2013 and made retroactive for 2012
· Work Opportunity Tax Credit extended one year; Section 179 – keeps in place the 2010/2011 levels of a maximum amount of $500k and $2 million phase-out for 2012 and 2013;
· Accelerated Depreciation —provides for 50 percent expensing for qualifying property purchased and placed in service before January 1, 2014 (and January 1, 2015 for certain long-term assets and transportation).
· Alternative Minimum Tax (AMT): The individual AMT is patched permanently.
· PEP and Pease: The personal exemption phase-out (PEP) and overall limit of itemized deductions (Pease) is reinstated for families with incomes over $300,000 and individuals with incomes over $250,000.
· Other credits: The American Opportunity Tax Credit, the enhanced Child Tax Credit, and the enhanced Earned Income Tax Credit from the American Recovery and Investment Act (the "stimulus") are extended for five years.
· Doc fix: The patch on the 29% cut in Medicare provider payments is extended for one year.
· Sequester delay: The $109 billion spending cuts mandated by the Budget Control Act are averted for two months due to $12 billion in spending cuts split evenly between defense and non-defense spending and $12 billion of increased revenues applied as an offset.
· Extended unemployment insurance: Federal extended unemployment insurance will continue for another year.
Additional details may be found in these two documents.
· The full text of the compromise law can be found at: http://www.gpo.gov/fdsys/pkg/BILLS-112hr8eas/pdf/BILLS-112hr8eas.pdf .
Ironically, the net result of the compromise is that President Barrack Obama effectively embraced the preponderance of the Bush tax cuts.
Because the deal simply moved the trigger date for the “sequester” of automatic spending cuts totaling $1.2 trillion over nearly a decade from January 1 to March 1, expect renewed debate to begin with the start of the 113th Congress on a long-term plan for deficit reduction. By most estimates, the U.S. government will reach its $16.4 trillion borrowing limit by the end of February – so wrangling will also renew the debt ceiling, entitlement reforms, and spending cuts. Additionally, the current stopgap spending measure expires on March 27, setting up either an additional catalyst for a broader brinksmanship scenario or yet another moment in a series of showdowns that continues from last year.
Prospects for comprehensive tax reform and entitlement reform remain uncertain, with both sides appearing unwilling to reach meaningful compromises without an imminent deadline with severe consequences. Since Congress is now likely to be consumed by a series of short-term budget battles, such partisan wrangling may distract Congress from the complicated process of achieving comprehensive tax and entitlement reform.
Saturday, December 29, 2012
As we go into the final weekend of 2012, Congress continues to wrestle with what to do about the fiscal cliff, the hundreds of billions of dollars in automatic tax increases and federal spending cuts that take effect at the end of the year unless Congress acts to avert it.
NAR is monitoring the situation closely. To help explain the real estate interests at stake, NAR Chief Economist Lawrence Yun and NAR Director of Tax Policy Linda Goold sat down today for a short discussion on the issues.
With Congress and the White House expected to negotiate through the weekend, NAR will be sending out another update on the fiscal cliff situation next week.
Click the link below to access a 6-minute video of their conversation and a short post summarizing their remarks.
Monday, December 24, 2012
Regardless of how you feel about the Affordable Care Act (ACA), the cloud of uncertainty has been removed. The ACA was passed by Congress and signed into Law by the President on March 23, 2010 and upheld by the Supreme Court on June 28, 2012. This new direction for health care will ensure dramatic change in demand for real estate used by hospitals and doctors. This is especially true locally given the large number of elderly Americans that retire in Florida, combined with our large proportion of poor uninsured and under-insured who will soon be added to the ranks of medically insured.
There are two main segments of medical office real estate: hospital-controlled buildings and doctor-controlled buildings. The problem over the past three uncertain years during health care reform debate was that neither hospitals nor doctors knew how health care reform was going to wind up. Well, now we know.
Health care (HC) systems have been more proactive regarding their real estate needs than doctors over the past three years while the debate raged. While not knowing for sure how reform was going to shake out, most hospitals felt change, was inevitable in one form or another, which would lead to more Americans becoming medically insured. Many HC systems have already taken steps to expand their real estate needs to accommodate this anticipated increased demand for care. Now that the Presidential election is over, eliminating any reasonable speculation about ACA repeal, many hospital systems across the U.S. are accelerating their expansion plans. HC systems are partnering with developers to construct new projects while others are using Sale/leaseback transactions involving existing facilities to self-fund their expansion.
Most private practice physicians adopted a “maintain the status quo” attitude over the past three years while hoping for an eventual repeal of ACA. This MD uncertainty fueled today’s pent up demand for medical real estate that is now being released. This is a new environment for doctors and is causing them to change the way they manage their businesses. I find that doctors focus on the bottom line today more than ever before.
For example, over the past twenty years it had become common for doctors that owned their own medical buildings to have their medical practices pay themselves (as Landlord) rent that often exceeded fair market rental rates. This was a popular way for doctors to create exceptional “in-house investments” where their medical office building (MOB) investment returns where often quite remarkable. But this meant their practices often paid very high rental rates that sometimes exceeded fair market rental rates by as much as 200%. When many of these doctor/MOB owner’s decided to sell their buildings prior to retirement, they quickly learned that a sale/leaseback to an investor created much higher sale prices than selling to another doctor or even to their own practice.
The reason for this phenomenon is that owner occupied MOB’s get appraised as though vacant because the appraiser is not allowed to use the existing lease (that would normally drive value higher) because the lease is between related parties and not deemed “arm’s length”. This is great for the acquiring practice but it causes the seller to leave a lot of money on the table.
On the flip side, when the MOB is sold in an arm’s length transaction to an investor and the MOB is then leased back by the medical practice, the appraiser must use the lease to calculate value. The market rent lease steers price much higher and in some cases by as much as 40% higher compared to selling the same MOB to another doctor.
Consequently, over the past 20 years, doctors that understood these advantages employed the sale/leaseback approach, often choosing the highest rental rate possible to set the highest possible sales price. This “pushing the envelope to the top” of fair market rental rates created some eye-popping sale prices and saddled medical practice tenants with very high future rents. While this was not a significant issue under the old way of doing business for doctors over the past twenty years, it is today. Now that ACA is anticipated to bring lower reimbursement rates to doctors in the future, doctors are very concerned and look to keep overhead as low as possible.
Today I see doctors doing the opposite of the past two decades and are either choosing a moderate rental rate for their lease back future; or they pick a below market rent sufficient to retire debt so they can lock in the lowest possible rent to maximize future practice profitability. This is a sound business move as doctors’ incomes are expected to be reduced. This is the fiscally responsible approach, in my view, and it is one example where ACA is helping to reduce the overall cost of health care in America.
Since ACA rewards doctors who work in bigger groups or alliances, there is a trend for single practice doctors to merge with larger medical practices or switch employment to hospital systems. Since stronger tenants are preferred by MOB investors, this trend of smaller groups merging into bigger medical groups is helping the single practice MD get a better price for his MOB than he would have when he was a solo practitioner.
Some forward thinking medical groups were ahead of this curve and started alliances years ago. Others are just getting started. But the trend is clear. Large medical groups are becoming more prevalent.
The Affordable Care Act is not perfect, and most doctors don’t like it because it reduces their future income. But ACA will add millions of individuals to the roles of the medically insured, and this will create higher future demand for health care services. This, in turn, will create higher future demand for medical office space for doctors to treat patients. There are strong, long-term, underlying business fundamentals for medical office building investments.