New Federal Tax and Spending Bill: How It Impacts the Real Estate Industry

 Tom Larson  |    February 04, 2016

On December 18, 2015, President Obama signed into law a $1.1 trillion tax and spending bill that will keep the federal government running until September 30, 2016. The bill passed both houses of Congress with bipartisan support and prevents a government shutdown until next fall, approximately six weeks before the November elections. 

In addition to new funding for government operations, the new omnibus bill contains approximately $600 million in new tax cuts. While most of the provisions are two-year extensions, the legislation contains several permanent policies. Many of these tax cuts have a direct impact on the real estate industry and will benefit homeowners, commercial property owners, builders, developers and REALTORS®.

The following is an overview of the key provisions in the new law impacting the real estate industry.

Federal tax policy

Mortgage debt forgiveness: Extends the provision that eliminates any taxes homeowners may otherwise incur due to renegotiating the terms of a home loan that results in forgiving or canceling a portion of the outstanding mortgage debt. This provision is extended for two years: 2015 and 2016.

Mortgage insurance premium deductibility: Extends provisions allowing taxpayers to deduct mortgage insurance premiums but is subject to an income cap starting at $100,000. The deduction is extended for two years: 2015 and 2016.

Section 179 expensing of business equipment and certain real estate: Makes permanent the provision that allows small and midsize businesses to immediately write off equipment, such as computers, machinery and vehicles, and certain real estate via the Section 179 deduction. The real estate includes leasehold improvements, certain restaurant improvements, and certain retail improvements. Moreover, the new law removes the $250K cap on this qualified real estate, which is half that of personal property, starting in 2016, so all business assets — real and personal — will have the same $500K limit each year with a $2 million phase out, and indexed for future inflation.

Bonus depreciation: Extends bonus depreciation for property acquired and placed into service during 2015 through 2019. Moreover, the provision now includes a new category called “Qualified Improvement Property,” which is defined as an improvement to the interior portion of an existing nonresidential commercial building, with the exception of elevators, escalators or enlargements. Thus, most leasehold improvements will now generally be eligible for immediate expensing for smaller and midsize businesses and for bonus depreciation, which is 50 percent expensing, for the bigger companies.

Charitable deduction: Makes permanent an expired provision that gives a charitable deduction for contributions of real property for conservation purposes.

Foreign Investment in Real Property Tax Act (FIRPTA): The bill includes two significant FIRPTA provisions: the first allows overseas investors to own up to 10 percent of a publicly-traded U.S. REIT, up from 5 percent; and the second provision allows foreign pension funds to own U.S. real property interests without triggering FIRPTA withholding tax. These changes are estimated to bring billions of dollars of foreign investment into the U.S. commercial real estate market.

Energy tax credit for new homes: Extends the tax credit ranging from $1,000 to $2,000 for the construction of new energy-efficient homes that exceed heating and cooling energy standards by 50 percent. The tax credit is extended for two years: 2015 and 2016.

Tax credit for energy efficiency improvements: Provides a credit worth up to $500, subject to a $500 lifetime cap, for homeowners who install qualified energy-efficient upgrades like new windows. The tax credit is extended for two years: 2015 and 2016.


EB-5 program extended: Extends the program that provides a method of obtaining a green card for foreign nationals who invest money — either $1,000,000 or at least $500,000 in targeted employment areas — in various commercial enterprise projects, without significant modification, until September 30, 2016.

Net neutrality: No amendments limiting implementation of net neutrality rules were included. The rules prevent internet providers from unfairly degrading internet service by, among other things, blocking access to apps and websites, limiting traffic speeds and selling fast lanes. 

Internet access taxes: The Internet Tax Freedom Act (ITFA), which bans state and local governments from imposing taxes on internet access, expired October 1, 2015. The omnibus extends the ban through October 1, 2016.

American communities survey (census bureau): Does not convert the American Community Survey (ACS) to voluntary status. Experts warn that making the ACS a voluntary survey would undermine the validity of the survey's results. NAR and other private entities depend on the ACS in their day-to-day business planning. NAR uses the ACS survey to benchmark its housing data series.


Leasehold improvement depreciation: The 15-year depreciation period for the leasehold improvements provision is extended permanently. Only a two-year extension was expected on this priority item.

Energy efficient commercial buildings (Section 179D): Extends the deduction for energy efficient improvements made to commercial buildings, including multifamily buildings, that exceed specific energy efficiency requirements. The deduction is extended for two years: 2015 and 2016.

Internet sales tax fairness: Advocates of internet sales tax fairness bills had hoped their language would be attached to the omnibus, but it was not included in the package.

Federal housing

Direct endorsement for rural housing: Today, every guaranteed loan must be individually reviewed by Rural Housing Service (RHS) staff, which is time-consuming and slows the loan process. Both the Veterans Affairs loan guaranty and the FHA's mortgage insurance program utilize approved private lenders for direct endorsement. This provision provides RHS with the authority to approve direct endorsed lenders, which will accelerate the loan processing time.

HAWK program: Continues the existing ban on the HUD implementing the Homeowners Armed With Knowledge (HAWK) program, which, among other things, would have allowed homeowners to participate in housing counseling and receive a reduction in their mortgage insurance premiums.

Eminent domain seizure of mortgages: This provision prohibits the FHA and Ginnie Mae from insuring or securitizing a loan on a home that has been seized through eminent domain. This mirrors a policy of the GSEs and is designed to eliminate the local practice of seizing mortgages via eminent domain authority in order to prevent foreclosure.

Enhanced income verification for rural housing: In the multifamily arena, public housing authorities and assisted housing managers are required to verify the income for their subsidized residents. However, rural properties were not provided the same access to IRS and Department of Labor data as similar properties insured by the HUD. Language in the omnibus allows for access to the same income verification data for both agencies. This will streamline and ease burdens on rural-assisted property owners.

HOME funding: HOME funding provides grants to state and local governments to produce affordable housing for low-income families. Eligible uses of HOME funding include down payment assistance, rental assistance, rehabilitation of affordable housing, and development. The omnibus provides $950 million for HOME funding, which is a $50 million increase over 2015.

National flood insurance program: Maintains funding levels for the National Flood Insurance Program and homeowner's advocate, with small increases for flood mapping and mitigation activities.

The provisions included in this article are only general descriptions and do not constitute tax or legal advice. Accordingly, REALTORS® should check with their tax professionals regarding the specific details of these policies.

Tom Larson is Senior Vice President of Legal and Public Affairs for the WRA.

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