Passive-loss bill vetoed, but there's still hope - George Bush vetoes H.R. 11 affecting real estate industry

Real Estate Weekly, Nov 18, 1992 by Therese Fitzgerald

One day after losing to Bill Clinton, President George Bush vetoed a bill that would have remedied some of the pain felt by the real estate industry as a result of 1986 tax reform.

Legislators supposedly held the bill, commonly known as H.R. 11, until Oct. 24 so, if the president saw the proposals as threatening to his campaign, it would still be on his desk after the election.

The House and Senate had agreed upon a package of measures, many which applied to real estate. Closest to the industry's heart was the "passive loss" provision, which would have enabled real estate professionals to use losses from rental property to offset business income if they passed a minimum threshold of involvement or ownership. In the area of debt restructuring, the bill would have allowed an investor to delay paying taxes on a property when they are discharged of indebtedness until the property is sold. It would also expand the private-sector investment opportunities for Real Estate Investment Trusts (REITs).

While disappointed, local and national industry representatives are confident that the bill was not rejected by the president because of the real estate provisions. They believe these provisions will surface again in another bill in the next session of Congress, and they have already begun their lobbying efforts.

Cary A. Brazeman, spokesperson for the National Realty Committee, said, "It was a very good bill for real estate. We're hopeful that many of our provisions, if not all, will see the light of day in a bill early next year . . . It was just a question of the right vehicle."

In Bush's memo of opposition, Beck said, there was no reference made to the real estate provisions. It was other points in the bill, she said, that did not agree with "his policy of tax restraint."

Though many of the faces in Congress are changing, Beck said, the two major committees that would shape such a bill -- the House Ways and Means Committee and the Senate Finance Committee -- will all be made up of senior members.

"We have a good scenario going despite the turnover in Congress," she said.

President-elect Clinton is also due to come out with an economic development package in his first 100 days. And, while he did not mention points included in H.R. 11 during his campaign, she said, it is believed that, in his attempt to increase investment and create jobs, he will want to cure some of the inequities facing the real estate industry.

"There was nothing to suggest he had anything but positive intentions," he said.

The Real Estate Board of New York and national real estate groups, Beck said have already begun to solicit the attention of some politicians for the preservation of H.R. 11's real estate provisions as well as some changes in them.

One provision that was vigorously debated, she said, was the extension of the depreciation on lease-hold improvements from 31.5 years to 40 years. Many think they were already too lengthy.

The passive loss measure, Beck said, was an amalgamation of other proposals, the most "broad-based" of which restored the rule back to what it was before 1986. What was agreed upon by Congress, however, she said, was disappointing to many members of the industry. H.R. 11 would have allowed real estate professionals to deduct losses from rental real estate only if they spent 50 percent of their time managing the property or had a 5 percent interest. Therefore, many brokers and managers and other professionals who also have less than a 5 percent interest in a property could not claim losses. In the case of "mega-deals", Beck said, a 1 percent interest could be substantial.