Legislative Update
By James A. Peck
For Industry, Leasehold Depreciation,
Carried Interest Top List of Concerns
SINCE LAST YEAR’S SHIFT TO A DEMOCRATIC-controlled Congress, a top priority of lawmakers has been
to reform the Alternative Minimum Tax. Unfortunately, their
plans for reform may come at a heavy cost to business in
general and commercial real estate in particular. At stake is
an increase in carried interest that would significantly hinder
partnership investment, as well an increase in the leasehold
depreciation rate, which reverted from the 15-year schedule to a 39-year schedule when Congress failed to pass
crucial tax extender legislation.
The current law taxes carried interest as a long-term
capital gain at 15%. Legislation was introduced in the
House last year (H.R. 2834) that called for carried interest
to be taxed at ordinary income rates, as high as 35%. And
late in 2007, a broader tax bill (H.R. 3996) designed to pro-
A quick-fix AMT “patch” at the expense of
the commercial real estate industry may
lead to the creation of a bigger hole.
tect millions of Americans from becoming subject to the
AMT, included the same tax increase on carried interest.
The bill passed in the House, but failed in the Senate.
The House and Senate are divided on the issue.
Specifically in the House, Speaker Nancy Pelosi (D-CA) and
Ways and Means Committee Chairman Charlie Rangel (
D-NY) support legislation that would increase the carried interest tax rate to help pay for an AMT patch. Meanwhile,
Senate Republicans and some Democrats oppose a permanent increase in the carried interest tax rate in favor of
short-term tax relief.
As an industry, we need to educate legislators on the
consequences of increasing the carried interest tax rate.
There is a misconception that only wealthy investors, such
as hedge fund managers on Wall Street, benefit from the
current 15% rate. Nothing could be further from the truth.
Nearly 50% of all investment partnerships are real estate
related, and investments through these entities are happening in both small and large firms in towns and cities
across the US. In fact, increasing the tax rate on commercial real estate may lead to less entrepreneurial risk taking in
less affluent and underserved markets where investment is
needed most. In short, a higher tax rate on carried interest
would more negatively impact small entrepreneurs who may
not have the same negotiating leverage as larger firms.
Leasehold depreciation is another issue the industry is
following very closely. The 15-year period for leasehold
deprecation expired at the end of 2007 and now tenant
improvements must be depreciated on a 39-year schedule.
Part of a package of “extender” tax provisions, leasehold
depreciation and other extenders were lifted by lawmakers
during the AMT debate in late 2007.
There is legislation currently before Congress to make
permanent the 15-year depreciation schedule, which was
introduced in the House by Rep. Joe Crowley (D-NY) and
in the Senate by Kent Conrad (D-ND). Neither bill has
received much attention thus far, even though the
President’s budget does propose making the 15-year
timeline permanent.
Commercial real estate is working closely with legislators
to ensure that leasehold depreciation is made permanent
or, at a minimum, extended. Among the industry’s supporting arguments is that a 15-year depreciation schedule more
closely reflects the reality of the marketplace. Leasehold
improvements typically don’t last longer than 15 years, at
most, before they are replaced. A 15-year depreciation
period will also provide much-needed certainty for investment that fosters productive economic growth. Further,
small businesses are negatively affected by a 39-year
leasehold depreciation treatment because they have a
dynamic growth rate and their space needs change
accordingly. And almost $250 billion is invested in commercial real estate upgrades annually, with $15 billion of that
amount going to leasehold improvements.
Real estate and other industries will suffer if Congress
does not work with us on carried interest and leasehold
depreciation. A quick-fix AMT “patch” at the expense of the
commercial real estate industry may lead to the creation of
a bigger hole. ◆
The views expressed in this article are those of the author
and not Real Estate Media or its publications.
James A. Peck is vice chairman of Building Owners and Managers
Association International and senior director in CB Richard Ellis’
Albuquerque office. He may be contacted at jim.peck@cbre.com.
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