Rather large decisions are facing the real estate investment community in the latter half of calendar year 2012. While those in the real estate industry are quite familiar with the term ‘caveat emptor’, for those who are unfamiliar with their old high school Latin class the translation means ‘buyer beware’.
The Bush Administration tax cuts are set to expire on January 1, 2013 unless the President and Congress step in to extend or amend this legislation. Presently the tax rate for sellers of income producing real estate is 15% in capital gains tax. Unless something is done prior to year end 2012, the capital gains tax rises to a minimum of 20%. This is effectively a 33% tax increase to the selling entity (Ouch!!). Are sellers of long term real estate holdings willing to pay the additional tax freight in the coming years? I think not.
However, sellers will still have the option of entering into a 1031 IRC Tax Deferred Exchange in order to defer the tax. A qualified intermediary/tax advisor can provide guidance through the steps necessary in order to affect the exchange qualifications parameters.
Not only will the non-action of Congress affect real estate owners, this laissez faire attitude will have dire consequences to the REIT industry. As we all know, the REIT industry is subject to the dispersal of dividends to their shareholders of up to 90% of their income. Corporate dividends now taxed at 15% could be taxed at a maximum rate of 45%, three times the existing rate.
As we head into the latter half of 2012, sellers of real estate may want to take advantage of the current tax law and decide which assets in their portfolio are most beneficial for exposure to the still heated equity markets in order to return investment and profit benefitting their stakeholders while doing so under the current tax laws. In the near term, these selected sales transactions would benefit the economy prior to the looming tax changes. In calendar year 2013, all bets are off.
Stay tuned in the coming months as we wait to hear from our elected officials in Congress in what could be the biggest tax increase in US history.
The previous piece was written by Brian O'Hear, Vice President - Office/Industrial of Calkain Companies.
Join us at the Convene in NYC, where we will be covering the entire national net lease, sales leaseback and 1031 exchange market across the property type. RealShare Net Lease attracts over 400 commercial real estate professionals across the sector at RealShare NET LEASE on April 1.