In his State of the Union address, President George W. Bush said we currently have an "archaic and incoherent tax code" and said he planned to make it fair to all and easier to understand. He also wants to encourage savings and investments and compete more effectively on the international front. He appointed a bipartisan advisory panel to study reform options and report its recommendations on July 31.
Those proposals must be revenue neutral and take into account the importance of home ownership and charitable giving. One option must be a complete overhaul of the current system. Other possibilities include incremental tax reform and adding a new consumption-based tax. Another proposal bandied about calls for a national retail sales tax that would replace the current income, payroll, estate and gift taxes. Panel members thought the retail tax approach is not likely to win approval.
"This is on the president's agenda," added Mark Garay, director of tax policy services of Deloitte Tax LLP. "It's clearly on the Capitol Hill agenda for 2006."
According to a Deloitte white paper, tax reform could affect every aspect of the real estate business. Some changes could be positive for the industry while others could be negative or impose new administrative burdens. The tax reform options under discussion may affect commercial and owner-occupied residential real estate from the following perspectives: the entity form selected to own the real estate; how investors view real estate as an investment; the choice of financing; and holding periods and gain and loss calculations, Other factors could include the taxation of on-going operations or real estate businesses, and a potential transition from the current system to a reformed system.
"Transition will be the most important aspect for the real estate industry," said Stephen Renna, senior vice president and counsel of the Real Estate Roundtable, adding that during a transition time, deals might be rushed or slowed up. "It will cause market disruption. We have no idea what the ripple effect will be."
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