March 05, 2009

The Federal Stimulus Bill: Important Tax Law Changes for Real Estate Investors

The $767 billion American Recovery and Reinvestment Act—better known as the economic stimulus package—contains several tax provisions that affect real estate investors.

First-Time Homebuyer Credit

The ARRA extends the existing first-time homebuyer credit first offered by the Housing and Economic Recovery Act of 2008 to allow first-time homebuyers earning less than $75,000 individually (or $150,000 for married couples filing a joint return) who purchase a home after April 8, 2008, but before December 1, 2009, to claim a tax credit in the amount of the lesser of 10 percent of the purchase price of the home or $8,000. For married individuals filing separately, the maximum credit is $4,000.

This credit is intended to encourage potential buyers to purchase their first home. Unlike the program in effect for the 2008 home purchases, the taxpayer receiving this tax credit is not required to repay this amount unless he or she sells the home or ceases to use the home as a principal residence within three years after the date of the purchase of the home.

Discharge of Indebtedness Income

The ARRA provides important new relief on discharge of indebtedness income. In general, a taxpayer realizes income when a discharge of indebtedness occurs, except in certain limited circumstances. Before the ARRA, any discharge of indebtedness income had to be fully recognized in the year of the discharge event. The ARRA permits discharge of indebtedness income resulting from the repurchase of certain debt instruments during the 2009 and 2010 calendar years to be realized ratably over five tax years from 2014 to 2018.

Taxpayers benefit from this change because they can defer the tax to later years—and none of their tax attributes need to be reduced. A taxpayer may elect not to defer the recognition of this income. This may be advantageous if (a) the taxpayer has a net operating loss that will offset the discharge of indebtedness income, or (b) the discharge of indebtedness otherwise qualifies for an exclusion which, with the required tax attribute reduction, is more beneficial than the deferral.

Bonus Depreciation for Qualified Property

The ARRA extends certain depreciation benefits. Taxpayers can claim 50 percent depreciation (also known as "bonus depreciation") for certain "qualified property," defined in Code Section 168(k)(2), in the year the property is placed in service. Qualified property is generally personal property, but it also includes certain leasehold improvements. To be eligible for bonus depreciation, qualified property must satisfy requirements related to time placed in service and time of acquisition.

Before the ARRA, the property generally had to be (a) placed in service before January 1, 2009 and (b) acquired by the taxpayer (x) during the 2008 calendar year if there was no written contract for such property before the 2008 calendar year or (y) pursuant to a written contract entered into during the 2008 calendar year. The ARRA extends similar bonus depreciation benefits to 2009. To be considered qualified property, the Code now requires that the property be placed in service before January 1, 2010, and that the property be acquired by the taxpayer (a) during the 2008 or 2009 calendar years if there was no written contract for such property before the 2008 calendar year or (b) pursuant to a written contract entered into during the 2008 or 2009 calendar year.

Net Operating Loss Carryback Periods

The ARRA provides that "eligible small businesses" (generally those with less than $15 million of gross receipts) may elect a three-, four-, or five-year carryback period for the 2008 net operating loss. Net operating losses may generally only be carried back two years and forward 20 years. A carryback generates refunds by allowing taxpayers to offset income that has previously been taxed during the carryback period. This change will benefit eligible taxpayers that did well financially during the economic boom but that do not expect to report profits for 2008.
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