Congress considers changes in capital gains and depreciation recapture

Journal of Property Management, May-June, 2008

Under current law, capital gains are taxed at a maximum rate of 15 percent. This rate is temporary and will revert to 20 per-cent as of January 1, 2011. When capital gains tax rates were reduced to 15 percent from 20 percent in 2003, the deprecia-tion recapture rate remained at 25 percent.

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Favorable capital gains tax rates provide a stimulus for owners wishing to sell appreciated property. Lower rates relieve the so-called lock-in effect, in which taxpayers are unwilling to sell property because of high tax costs associated with sales. Lower capital gains rates also partly mitigate the built-in gain that arises from inflation.

The "gain" on the sale of real estate often is due to extrinsic factors--not excessive tax depreciation. Gains in real estate often are attributable to inflation; appreciation in the value of the land; road and other transportation improvements; as well as the marketplace and economy in general. Applying a recapture rate to this appreciation higher than the capital gain rate is inappropriate because the appreciation is capital gain. Such treatment would discriminate against real estate relative to other assets and put real estate at an even greater competitive disadvantage for investment dollars.

IREM believes it is best for Congress to encourage real estate investment in the United States by creating a tax system that recognizes inflation and creates a meaningful differential between the tax rates for those who choose to invest in real estate and those for capital gains. IREM supports a level playing field for those investing in real estate and thus opposes rates for depreciation recapture that are higher than the capital gains rate.

Further, IREM supports depreciation reform for nonresidential and residential real estate that secures a significantly shorter cost recovery period for commercial real estate without adding complexity or creating artificial acceleration of deductions.