Senate Finance Committee Chairman Max Baucus rolled out additional draft tax reform legislation prior to the Thanksgiving recess, resulting in less than favorable policy changes for the commercial real estate industry. On the positive side, the legislation reforms the Foreign Investment in Real Property Tax Act (FIRPTA) to, among other things, increase from five to 10 percent the amount that a foreign investor can invest in a publicly traded U.S. real estate investment trust (REIT) without triggering U.S. tax liability under FIRPTA.
Some of the less attractive proposals include an increase of the depreciation period for buildings from 39 years to 43 years and an increase of the depreciation period for leasehold improvements from 15 years to 43 years. The current 15-year depreciation period will revert to 39 years at the end of 2013 absent Congressional action. Other proposed reforms to the tax code include the repeal of a building owner’s ability to defer gain on like-kind (Section 1031) exchanges and the repeal of the tax deduction for energy-efficiency improvements to commercial buildings (under Section 179D). .