Vijay Yadlapati, NATIONAL ASSOCIATION OF REALTORS® Associate
Commercial Policy Representative
As NAR’s Commercial Policy Representative, Vijay monitors and analyzes federal legislative and
regulatory developments in order to shape the direction of today’s policies. Additionally, Vijay lobbies
the U.S. Congress and federal regulatory agencies to ensure that the interests of the commercial real
estate industry are addressed.
Fiscal Cliff Agreement: Impact on Real Estate
After a chaotic 23 hour struggle regarding the fiscal cliff, the drama
in Washington came to a close late Tuesday, January 1, as the fiscal cliff deal passed the U.S. House of Representatives and Senate.
The legislation, entitled The American Taxpayer Relief Act, was
signed into law by President Obama the next day. Though the deal
averts an immediate budget crisis, it sets the stage for months of
renewed confrontations between Republicans and Democrats
over the debt-ceiling, entitlement reforms, spending cuts beyond a
two-month delay of massive budget cuts, and a long-term plan for
While the new law provides many benefits for the commercial
real estate industry (listed below), abrupt and complicated changes
to the capital gains and personal income tax rates could hamper the
sector’s recent recovery. Specifically, the law raises the top capital
gains and dividend rate to 20 percent for taxable income exceeding
$450,000 for couples and $400,000 for individuals. However, the 15
percent rate is preserved for those with taxable incomes below the
$450,000/$400,000 threshold. Additionally, the law permanently
extends Bush-era personal income tax rates for taxable income up
to $450,000 for couples and $400,000 for individuals. Taxpayers
earning more than these thresholds will see their top marginal rate
rise to at 39. 6 percent, up from 35 percent.
Furthermore, the law may create some confusion for taxpayers that have both ordinary income and capital gains income. For
example, how would a married couple calculate their capital gains
rate if they earned, say, $300,000 in ordinary income and $500,000
in capital gains?
Summary of Other Key Real Estate Provisions
• Carried interest will continue to track the capital gains rate.
• 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 percent from the current 35 percent.
• Bonus depreciation: This provision extends the current 50
percent expensing provision for qualifying property purchased
and placed in service before January 1, 2014 (before January
1, 2015 for certain longer-lived and transportation assets) and
also allow taxpayers to elect to accelerate some AMT credits in
lieu of bonus depreciation.
• 15-year straight-line cost recovery for qualified leasehold
improvements on commercial properties is extended through
2013 and made retroactive to cover 2012.
• 7-year recovery period for motorsports racetrack property: The law extends for two years, through 2013, the special seven year cost recovery period for property used for land
improvements and support facilities at motorsports entertainment complexes.
• Alternative Minimum Tax (AMT) is patched permanently.
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 federal government is set to shut down on March
27 unless Congress authorizes a continuing spending resolution.
This could set 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 bickering may
distract lawmakers from the complicated process of achieving comprehensive tax and entitlement reform.