Congress passed sweeping legislation on December 18, 2015, that puts an end to many of the stop-gap funding measures known as “Continuing Resolutions,” an Omnibus appropriations bill and a tax extenders package. This more than two-thousand pages of legislation has given Commercial Real Estate some major wins. The President is expected to sign this into law when it arrives at the White House later today.
Commercial Real Estate provisions include:
Federal Tax Policy
- Immediate Expensing of Business Equipment and Certain Real Estate: The expensing provision for equipment and certain real estate used by small- and mid-sized businesses is made permanent (section 179). The real estate includes leasehold improvements, certain restaurant improvements, and certain retail improvements. Moreover, the $250K cap on this qualified real estate (which is half that of personal property) is being removed starting in 2016, so all business assets (real and personal) will have the same $500K limit each year, and indexed for future inflation.
- Bonus Depreciation: extends bonus depreciation treatment for five years. Moreover, the provision now includes a new category called “Qualified Improvement Property,” which is defined as an improvement to the interior portion of an existing non-residential commercial building (except for elevators, escalators, or enlargements). Thus, most leasehold improvements will now generally be eligible for immediate expensing for the smaller and mid-size businesses and for bonus depreciation (50% expensing) for the bigger companies.
- Charitable Deduction – The expired provision that gives a charitable deduction for contributions of real property for conservation purposes is made permanent.
- Foreign Investment in Real Property Tax Act (FIRPTA) – The bill includes two significant FIRPTA provisions. The first allows overseas investors to own up to 10% of a publicly-traded U.S. REIT (up from 5%). The second provision allows foreign pension funds to own U.S. real property interests without triggering FIRPTA withholding tax. These changes are estimated to bring billions of dollars of foreign investment into the U.S. commercial real estate market.
- EB-5 Program Extended: A clean extension (no reforms) until Sept. 30, 2016.
- Net Neutrality: No amendments limiting implementation of net neutrality rules were included.
- Internet Access Taxes: The Internet Tax Freedom Act (ITFA), which bans state and local governments from imposing taxes on Internet access, expired October 1, 2015. The Omnibus extends the ban through October 1, 2016.
- American Communities Survey (Census Bureau): Does not convert the American Community Survey to voluntary status. Experts warn that making the ACS a voluntary survey would undermine the validity of the survey’s results. NAR and other private entities depend upon the ACS in their day-to-day business planning. NAR uses the Survey to benchmark its housing data series.
- Leasehold Improvement Depreciation – The 15-year depreciation period for leasehold improvements provision is extended permanently. Only a two-year extension was expected on this priority item.
- Energy Efficient Commercial Buildings (Section 179D) – The agreement extends for two years (2015 & 2016) the energy-efficient commercial buildings deduction.
- Internet Sales Tax Fairness – Advocates of Internet Sales Tax Fairness bills had hoped their language would be attached to the Omnibus, but it was not included in the package.
- Waters of the U.S. (WOTUS) Prohibition – No provision was included to prohibit the EPA from spending funds to implement the EPA’s Waters of the U.S. rule.
- Land and Water Conservation Fund (LWCF) – The LWCF was funded at $450 million, with 50% provided to state and local governments for land acquisition and recreational activities.