Real Estate Roundtable Says Proposed
Tax Restructuring Could Affect Valuations

In a letter to Treasury Secretary John Snow, the Real Estate Roundtable expressed concerns about a proposal to change tax policy that would devalue owner-occupied and rental housing as well as investment real estate. The proposal would affect both commercial and residential valuations, according to The Roundtable, an organization that brings together key real estate industry leaders to jointly address key national policy issues relating to real estate and the overall economy.

The February 27 letter was in response to findings of the President’s Advisory Panel on Federal Tax Reform, which are under review by the Treasury Department as it works on its own set of tax restructuring recommendations for the president. The advisory panel's recommendations "fail to recognize adequately the substantial importance of real estate to the economy,” stated Roundtable President and CEO Jeffrey D. DeBoer.

According to The Roundtable letter, the panel's proposals to simplify depreciation are problematic, as they would be less generous to real estate than under the current system. The proposal would impose a five-year, declining balance depreciation transition rule for assets (including buildings) placed in service prior to the effective date of the reform law. A five-year period is simply too short to accommodate the needs of real estate owners, DeBoer asserted, warning that significant capital investment would go unrecovered and have a negative effect on property valuations. The rule's "declining balance" element would only exacerbate the inadequacy, he added.

On the homeownership side, the panel proposed to convert the home mortgage interest deduction into a credit, limit the amount of mortgage debt eligible for the credit and exclude second homes from the credit. Additionally, it recommended repealing the deduction for state and local income taxes. As DeBoer explained to Snow, both proposals could significantly affect home valuations.

DeBoer also noted the advisory panel's strong bias in favor of non-real estate businesses that operate as C corporations, explaining that most real estate firms operate largely through other types of ownership vehicles/structures, such as sole proprietorships, partnerships, limited liability companies and REITs.

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