TRANSACTION VOLUME NOT LIKELY TO BE HARMED BY NEW TAXES, SAYS BROKER

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By Michael Bull

Depending on their circumstances, investors in commercial real estate could face noticeably higher tax burdens in 2013 and the years ahead. However, having to fork over more money to Uncle Sam isn’t likely to have a sizeable impact on transaction activity in the sector.

Those were some of the points made by accounting and real estate experts in a recent episode of the “Commercial Real Estate Show,” a nationally syndicated weekly talk radio show about business and commercial real estate-related topics in the U.S. The episode provided a look at the many recent federal tax changes, such as increased income and capital gains tax rates, and provided detailed analysis of their potential effects on the commercial real estate sector.

“Taxes aren’t what’s been motivating commercial real estate investors that have gotten back in the asset class in the post-recessionary period,” says Mitch Roschelle, a partner at PricewaterhouseCoopers and the leader of the firm’s U.S. Real Estate Advisory Group. “They like commercial real estate because of its durability of income over time.”

“Any income-producing asset is going to have the same adverse tax consequences, and real estate is less volatile than perhaps stocks and bonds can be over time,” Roschelle adds.

A Sea of Changes

The recent federal changes include the rise of the top marginal income tax rate from 35 percent to 39.6 percent, an increase in the capital gains rate from 15 percent to 20 percent for top earners, and a new 3.8 percent tax on certain investment income for individuals with adjusted gross incomes above $200,000 and couples making more than $250,000.

According to Thomas Nice, a partner with CohnReznick, the heavier tax burdens are likely to give rise to an increase in 1031 exchanges, which under certain circumstances permit a seller to defer the tax associated with a property sale if the owner then acquires a similar, or “like-kind,” property within 180 days.

“You may want to think and think real hard about doing a deferred exchange,” Nice says

Certain commercial real estate entities could also be impacted by the federal healthcare law that, starting in 2014, fines larger employers —meaning those with at least 50 full-time employees — $2,000 per worker per tax year if those firms do not provide health insurance to their employees, Nice adds.

Higher taxes also could affect the pricing of transactions to some degree, adds Timothy Trifilo, a tax partner with PricewaterhouseCoopers. “It’s hard to say how [the changes] will affect the volume of transactions,” he says. “What I think it may have a more direct impact on in the short run would be pricing. Someone might be asking for more now than they might have otherwise to cover the [tax increases].”

“Will they be able to get more, or will they have to wait to sell, or will they have to go into some other tax-deferred-type transaction to get the amount of value they want now?” says Trifilo.

One benefit contained in the recent flurry of tax changes is the extension through 2013 of the 15-year straight-line cost recovery of qualified leasehold improvements, Trifilo adds. Typically, those costs are depreciated on a straight-line method over 39 years. The extension might make someone more likely to rehab a building, Trifilo notes.

The Big Picture

Roschelle provided a nice closing note to the program: “I think as long as the fundamentals for commercial real estate — meaning jobs, economic growth, rent growth — are all strong, the vitality of the asset class is unaffected [by the changes] … From the investment sales perspective, there’s still a lot of interest in the asset class, and I think transaction volumes in 2013 will be up from where they were in 2012.”

The entire episode on tax changes and their impact on commercial real estate is available at CREshow.com.

Michael Bull is a commercial real estate writer, instructor, speaker consultant, radio show host and active real estate broker. He is the founder of Atlanta-based Bull Realty and the radio show host of the “Commercial Real Estate Show.”

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