LOOKING AHEAD

The November elections may bring a ray of sunshine to stimulate the Central Florida Real Estate Market. I believe most business owners are dealing with a great deal of uncertainty about what to do, if anything. Honestly, this has been the most challenging time in my business of selling and leasing Commercial Real Estate.  However, I am still the optimist and have been for over 40 years in this Industry.  Here are some possible solutions to help cultivate a bright future for us and our Industry.

TAX CHANGE

What this country needs is a kick-start in Commercial Real Estate by bringing back the 15-year depreciation schedule.  For anyone over 60, you may remember a time in 1980 when we had interest rates at 18-20%.  The Real Estate Markets were at a standstill, much like today.  In 1981, new tax law changes allowed for a 15-year depreciation schedule on Commercial Real Estate; in combination with other tax changes, this helped get us out of the recession.  Reaganomics got this country's economy going again.  Here is my proposal and if you are reading this, please respond with your thoughts on these changes:

1. Allow a 15-year depreciation schedule on any sale after, say, January 1, 2011 through 2016 on Commercial Properties.  In other words, the new depreciation schedule is limited to this 5-year period.
2. Ensure that Capital Gains remain at 15%
3. Recapture depreciation at a Capital Gains rate of 15% for all sales between January 1, 2011 and December 31, 2015.

IMPORTANT CONSIDERATIONS 

If Congress wants to give the country's real estate industry a jump start, shortening the depreciation life to 15 years and reducing the Capital Gains tax rate to 15% for un-recaptured depreciation would be important.  However, in order for these changes to have impact, the Passive Activity Loss (PAL) rules of Section 469 of the Internal Revenue Code need to be done away with as well. 

The way the PAL rules work is that taxpayers who invest in U.S. real estate are very limited regarding the tax deductions they can claim for rental real estate.  If their Adjusted Gross Income (AGI) is over $150,000 and they are not real estate professionals, their rental losses can not offset active business income, such as salaries and wages from employment or active business losses from a sole proprietorship, partnership or S corporations. 

Instead, those PALs can only offset other passive income, such as other rental real estate profits or income from a business in which they operate only as a non-active investor.  Furthermore, those with AGI of less than $100,000 have to be active participants in the real estate rental operation to get a maximum $25,000 deduction; remember, the $25,000 deduction cap is phased out 50 cents on the dollar for every dollar of AGI above $100,000 and is totally phased out at $150,000.  'Active participant' means making decisions to approve tenants, approve repair expenditures and similar types of decisions, rather than leaving these up to a management company. 

Real estate professionals (those who put in 750 hours per year of documentable participation in real estate activities) in contrast, can deduct rental losses against wages and salaries, and income from proprietorships, partnerships and S corporations.  If non-real estate professionals could deduct their rental losses against their salary and wage income, or against their proprietorship, partnership and S corporation income they would be much more motivated to invest in U.S. real estate.

THE BOTTOM LINE

In conclusion, the $8,000 tax credit for residential buyers was a successful change that jump-started the residential markets.  In my opinion, this proposal would do the same for Commercial Real Estate.  If you like this idea, pass it on to those you may have influence with.  And feel free to call me to discuss your thoughts.