New Real Estate Spin Off Rules

As floated earlier this month, the bill does contain a measure restricting how companies can spin off their real estate assets.

The provision, included in the portion of the measure that provides some $629 billion in tax cuts, says that "a spin-off involving a REIT will qualify as tax-free only if immediately after the distribution both the distributing and controlled corporation are REITs. In addition, neither a distributing nor a controlled corporation would be permitted to elect to be treated as a REIT for ten years following a tax-free spin-off transaction."

Companies that have been speaking with the Internal Revenue Service about such a transaction are grandfathered in. Otherwise the rule will apply to any distributions on or after Dec. 7.

FIRPTA

The commercial real estate community also got its long-standing wish to have the Foreign Investment in Real Property Tax Act of 1980 expanded. It too was in the tax package, included as an amendment to the so-called tax extenders, and it survived the last-minute negotiations.

The measure increases the stake a foreign shareholder may hold in a publicly traded stock to 10% without being subject to the FIRPTA tax. The measure also exempts foreign retirement and pension funds from FIRPTA.

The Extenders

The tax-extenders, of course, are those evergreen series of tax breaks that routinely are passed by Congress each year -- although sometimes not -- that are important to business. They include tax breaks for R&D and expensing limits among many others. Several of these were made permanent in this bill -- including one measure very important to CRE, which is the leasehold deduction.

In the House measure, the 15-year straight-line cost recovery for qualified leasehold improvements, qualified restaurant buildings and improvements, and qualified retail improvements has been permanently set.

A related provision about the treatment of certain real property as section 179 property has also been permanently extended -- the small business expensing limitation and phase-out amounts in effect from 2010 to 2014 ($500,000 and $2 million, respectively). The provision modifies the expensing limitation by indexing both the $500,000 and $2 million limits for inflation beginning in 2016 and by treating air conditioning and heating units placed in service in tax years beginning after 2015 as eligible for expensing. The provision also eliminates the $250,000 cap beginning in 2016.

The extenders package also:

• permanently extended the application of the 9% minimum credit rate for the low-income housing tax credit for non-federally subsidized new buildings.

• permanently extended the exclusion of military basic housing allowances from the calculation of income for determining eligibility as a low-income tenant for purposes of low-income housing tax credit buildings.

• authorized the allocation of $3.5 billion of new markets tax credits for each year from 2015 through 2019.