Monday, February 18, 2013

Read My Lips: CRE Transaction Volume Not Likely to Be Harmed by New Taxes


Michael Bull in Radio Studio
ATLANTA, GA (Feb. 18, 2013) – 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 a panel of accounting and real estate experts in the most recent episode of the “Commercial Real Estate Show” radio program, hosted by Michael Bull of Bull Realty.


Mitch Roschelle
The episode provided an enlightening look at the many recent federal tax changes, such as increased income and capital-gains 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,” said 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.”

Thomas Nice
 “They like it because of its resilience in an unstable economic environment, and I don’t think they’re going to run away from it because the tax on those earnings is higher,” Roschelle added. “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.”

The recent federal changes include the rise of the top marginal income tax rate to 39.6 percent from 35 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 some investment income for individuals with adjusted gross incomes above $200,000 and couples making more than $250,000.

Timothy Trifilo
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 an owner 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 said.

 Higher taxes also could affect the pricing of transactions to some degree, added Timothy Trifilo, a tax partner with PricewaterhouseCoopers. “It’s hard to say how [the changes] will affect the volume of transactions,” he said. “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].”

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 added. 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 noted.

“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,” Roschelle concluded.

For a complete copy of the company’s news release, please contact:

Stephen Ursery
The Wilbert Group
Office: (404) 965-5026
Cell: (404) 405-2354


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