October 2008

BEYOND THE BAILOUT: ECONOMIC STABILIZATION ACT OF 2008 EXTENDS REAL ESTATE AND ENERGY TAX PROVISIONS

Congress passed the Emergency Economic Stabilization Act of 2008 ("the Act") on October 3, 2008 in response to the economic and banking crisis that has dominated the news over the last month. President Bush immediately signed the bill into law on the same day. While much of the media attention and scrutiny of the bill centered on the so-called "bailout" legislation for the troubled financial sector, the Act also contained a number of significant real estate and energy-related tax provisions.

DEPRECIATION
The Act extended the accelerated depreciation allowance for qualified leasehold improvement property over a 15-year recovery period instead of a 39-year recovery period. This provision applies to leasehold improvement property placed in service by December 31, 2009. Qualified leasehold improvement property is any improvement to an interior portion of nonresidential real property (i.e., commercial property) provided that the following requirements are met:

• The improvement is made under, or pursuant to, a lease by the lessee, lessor or any sublessee to an interior portion of a building
• The improvement is made to a structural component of a building and is not classified as personal property (i.e., equipment or furniture)
• The lease cannot be between related parties
• The interior portion of a building has to be occupied exclusively by the lessee in that portion of the building
• The building has to be more than three years old

From a planning perspective, if a qualified leasehold improvement property is placed into service by December 31, 2008, then the cost of those improvements is eligible for the additional 50 percent bonus depreciation. For example, if a landlord made a $200,000 improvement to the interior portion of a commercial building pursuant to a lease by December 31, 2008, assuming that all of the factors were met to classify this improvement as a qualified leasehold improvement, then $100,000 would be expensed on the landlord's 2008 tax return in addition to the regular depreciation on the remaining $100,000 of basis. If the landlord made the improvement in 2009, the 15-year depreciation would apply, but no 50 percent bonus depreciation would be available.

A similar 15-year recovery provision for qualified restaurant property was extended through 2009. Qualified restaurant property is any real property which is an improvement to a building that is more than three years old and devotes more than 50 percent of the building's square footage to the consumption of prepared meals. However, the 50 percent bonus depreciation does not apply to this type of property.

In addition, a new category of property, "qualified retail improvement property", was created by the Act, and is eligible for the 15-year depreciation recovery period. The ability to use the 15-year recovery period only applies to qualified retail improvements placed into service in 2009. Qualified retail improvement property is an interior improvement to a building used for retail business if the building is at least three years old when the improvement is made. Essentially, this provision extends the benefits discussed above for qualified leasehold improvements to retail properties that are owner-occupied.

ENERGY (GREEN PROVISIONS)
The Act extends the deduction for energy-efficient commercial building improvements through 2013. Energy-efficient commercial building property is defined as depreciable property that is installed as one of the following commercial building components:

• Interior lighting systems
• Heating, cooling, ventilation and hot water systems
• The building's envelope

The energy-efficient deduction is normally claimed by the building's owner, but can be claimed by the primary person responsible for designing the property in the case of a public building. The maximum amount of the deduction is $1.80 per square of the building. A partial deduction is also available if certain energy savings targets are obtained by the building's owner.

The Act also extended the availability of a tax credit to contractors who construct or manufacture new energy-efficient homes through 2009. A contractor can claim a $1,000 or $2,000 tax credit and the ability to receive the credit depends on the energy savings achieved by the home.

In addition, the Act contained provisions relating to residential energy tax credits for qualifying expenditures made by homeowners. These residential energy credits are broken down into the following categories.

Residential Energy Property Credit - A $500 tax credit is available in 2009 to homeowners that purchase energy-efficient exterior doors and windows, metal roofs, insulation, heat pumps, furnaces, central air conditioners and water heaters. Since the credit is only available for 2009, you may want to delay the purchase of the above items until 2009 in order to take advantage of this credit.

Residential Alternative Energy Credit - A nonrefundable tax credit for specific alternative energy equipment installed in connection to a homeowner's residence is available from 2008 through 2016. The residential alternative energy credit is 30 percent of the following expenditures:

• Qualified solar electric property
• Qualified solar water heating property
• Fuel cell property
• Small wind energy property
• Geothermal heat pump property

The tax credit may be capped at a certain amount depending on the type of equipment involved. For example, the maximum available credit for geothermal heat pump property is $2,000.

MISCELLANEOUS PROVISIONS
The Act extended the $500 deduction ($1,000 for joint returns) for state and local real property taxes through 2009. This deduction relates to taxpayers who do not itemize their deductions and take the standard deduction on their individual tax return. This deduction is in addition to the regular standard deduction on the taxpayer's return.

The Act also extended the $2 million exclusion of income related to the discharge of indebtedness of a taxpayer's principal residence through 2012. This provision was originally enacted at the end of 2007 as a response to the sub-prime lending crisis.

CONCLUSION
In summary, the Act contains several provisions that relate to real estate and energy efficiency. These provisions are complex and, like any tax law, there are potential exceptions to the general rules discussed above – especially the energy-related provisions. It is recommended that you consult with your CB&H Real Estate & Construction tax specialist to determine if you are eligible for any of the deductions and credits discussed above. As always, the tax professionals at Cherry, Bekaert & Holland stand ready to assist you with understanding how the provisions of this new law can help you and your business maximize tax savings beginning this year.

About Cherry, Bekaert & Holland, L.L.P.