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15 Prob. & Prop. 1 (1986)

handle is hein.journals/prbtprty15 and id is 1 raw text is: Section of Real Property, Probate and Trust Law American Bar Association Vol. 15, No. I Summer 1986 The Effect of the Senate Finance Committee's Tax Reform Bill on the Real Estate Industry by William L. O'Callaghan, Jr.* and Steven J. Printzt In March of 1986, Senator Robert Packwood, chairman of the Senate Finance Committee, intro- duced the first of what were to be his two tax re- form proposals to the Senate Finance Committee. The original proposal released in March (the Pro- posal) set individual and corporate tax rates at a maximum of 35 percent. The Committee modified the Proposal to provide numerous tax breaks for various special interest groups. As a result, the Pro- posal failed to meet the goal of revenue neutrality and was never voted on or approved by the Senate Finance Committee. Parts of the Proposal became the basis for, and were adopted in, the revised Sen- ate proposal (the Bill), which was approved by a unanimous vote of the Senate Finance Committee in May. Accordingly, it is anticipated that the pro- visions of the original Proposal and the Finance Committee Bill will be the subject of debate on the Senate floor. PROVISIONS OF THE MARCH PROPOSAL RELATING TO THE REAL ESTATE INDUSTRY Depreciation Under the earlier Proposal, the accelerated cost recovery system would be retained with certain re- covery periods being extended. Residential real property would be depreciated using the straight- line method over 25 years. All other real estate would be depreciated using the straight-line meth- od over 30 years. There would be no indexing of depreciation deductions. Further, the current law recapture rules of sections 1245 and 1250 would be retained. These provisions would generally be ef- fective for property placed in service after 1986, subject to standard transition rules. *Chair, Real Property Division Committee D-2 on Federal Tax Aspects of Real Estate Transactions. Steven J. Printz is an associate attorney with Mr. O'Callaghan's firm. Capital Gains The top individual tax rate on long-term capital gains would remain at 20 percent. The top corpo- rate tax rate on long-term capital gains would re- main at 28 percent. There would be no indexing of the basis of capital assets. Interest Expense The deduction for consumer interest would be limited to $1,000 ($2,000 for joint returns). The deduction for investment interest (in excess of net investment income) would be limited to only any excess remaining to the taxpayer for the year of the $1,000 (or $2,000) limit applicable to consumer in- terest. This provision would be phased in ratably over a five-year period. Accordingly, 20 percent of the difference between the allowable interest de- duction under current law, less the interest deduc- tion under the Proposal, would be disallowed in 1987, 40 percent of that amount would be disal- lowable in 1988, and so on until the Proposal is ful- ly phased in after 1990. Interest on principal resi- dences and second residences would be excepted from the limitation, with residences to include housing cooperatives. Interest deductions would be (continued on page 2) Copyright © 1986 American Bar Association Produced by the ABA Press

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