New Farm Tax Bill and Recent Economic Stimulus Act Include Several Real Estate Tax Incentives

The Food, Conservation and Energy Act of 2008

On May 22, 2008, Congress overrode President Bush’s veto and enacted the Food, Conservation and Energy Act of 2008 (“the Farm Bill”). While the Farm Bill primarily provides significant benefits to farmers, ranchers and timber producers, it also enacts several real estate-related tax provisions.

Enhanced Like-Kind Exchanges - The Farm Bill amends the like-kind exchange rules under Code Section 1031 to permit the exchange of shares in certain mutual ditch, reservoir or irrigation companies. Gain or loss realized on the sale of property is recognized for tax purposes unless a specific tax code provision excludes that recognition. The like-kind exchange rule in Section 1031 provides that no gain or loss is recognized when business or investment property is exchanged solely for other business or investment purposes. Though the like-kind exchange rule does not apply to an investment in stock, the Farm Bill excludes shares of mutual ditch, reservoir or irrigation companies from the Section 1031 definition of stock.

In some states, mutual ditch, reservoir or irrigation companies are used to manage joint water distribution rights. Stocks in these companies actually represent water rights that may be recognized as real property under state law. Thus, the exchange of mutual ditch, reservoir or irrigation company stock is essentially an exchange of real property that now qualifies for Code Section 1031 like-kind exchange treatment.

Conservation Easements - The Farm Bill extends the increased charitable contribution deduction for qualified conservation contributions of real property from January 1, 2008 through December 31, 2009. A qualified conservation contribution is a contribution of a qualified real property interest to an authorized organization exclusively for conservation purposes. The contribution may consist of an owner’s entire interest in the property, except for certain mineral interests, or it may be limited to an easement or restrictive covenant that prevents the development of land to ensure the safeguarding of its natural character.

Generally, deductions for contributions of capital gain property (such as real property) are limited to 20 percent of the donor’s adjusted gross income (AGI). However, the Farm Bill extends a 2006 tax law provision that allows qualified farmers and ranchers a charitable contribution deduction of up to 100 percent of their AGI for qualified conservation contributions. In addition, the Farm Bill also extends the provision to allow taxpayers (other than qualified farmers and ranchers) to deduct a qualified conservation contribution up to 50 percent of their AGI.

If you are the owner of real property and have considered placing an easement on your property or donating a portion of your property for conservation purposes, the Farm Bill provides a significant tax planning incentive to take action for 2008 and 2009. In addition to the charitable contribution deduction, some states offer tax credit incentives for the donation of qualified conservation property.

Timber Provisions - The Farm Bill includes several timber-specific provisions. The first provision temporarily reduces the tax rate for C corporations to 15 percent (for both regular tax and alternative minimum tax) on sales of qualified timber. This provision is generally effective for one year beginning on May 22, 2008.

In addition, a real estate investment trust (REIT) can treat gains from certain timber sales as qualified income for purposes of the REIT income tests. The Farm Bill also adds a new category of REIT, the Timber REIT, which helps ease some of the strict qualification requirements for REITs in regards to a timber business.

The Economic Stimulus Act of 2008

President Bush signed the Economic Stimulus Act of 2008 (“the Stimulus Act”) on February 13, 2008. In addition to providing tax rebate checks, the Stimulus Act also includes two tax planning opportunities that can help your business in 2008.

Enhanced Expensing under Code Section 179 - The Stimulus Act increases the Code Section 179 expensing election to $250,000 and increases the threshold for reducing the deduction to $800,000. It applies to qualifying property (such as furniture, fixtures, machinery and equipment) purchased and placed into service in 2008. However, real property, such as land and buildings normally depreciated over 39 years, does not qualify as Section 179 property.

There are restrictions on the amount of qualifying Section 179 property that can be expensed during 2008. For example, the $250,000 is phased out dollar for dollar when the total amount of qualifying property purchased in 2008 exceeds $800,000. This means that the ability to use this deduction is completely phased out when purchases exceed $1,050,000. Also, the deduction is disallowed if a taxpayer does not have taxable income in 2008.

Bonus Depreciation - The Stimulus Act temporarily allows qualifying taxpayers the ability to expense 50 percent of the purchase price of qualifying property in 2008. To be eligible to claim the bonus depreciation, the purchased property generally must share one of the following characteristics:

• A depreciation period of less than 20 years
• Off-the-shelf computer software – software that is not custom designed for your business and is available to the general public
• Qualified leasehold property – generally applies to leasehold improvements made to the interior portion of a building
• Qualified water utility property

The Stimulus Act also raises the expensing limits for automobiles classified as “luxury” automobiles. There are limits on the amount of depreciation that is available in the first year (and subsequent years) related to these types of automobiles. The Stimulus Act raises the amount of depreciation that can be claimed in 2008 for luxury automobile purchases to $11,060 for cars (as compared to the regular first-year depreciation of $3,060 for luxury automobiles).

The above provisions can be combined to provide powerful tax savings opportunities in 2008. For example, if you have maximized your Code Section 179 deduction of $250,000, you can then take the 50 percent bonus depreciation on the remainder of the qualifying assets. Also, unlike Code Section 179, you can utilize the 50 percent bonus depreciation regardless of your taxable income or loss.

In addition, the bonus depreciation provision provides significant tax planning opportunities for commercial building property owners that are considering a cost segregation study. In a cost segregation study, building components are broken out into various depreciation categories with corresponding depreciable periods. You can not only take advantage of the shorter depreciation period for components such as wiring and removable partitions, but you could also utilize the additional bonus depreciation in 2008 to recognize your depreciation benefit much faster.

Contact the real estate and construction tax specialists at Cherry, Bekaert & Holland today to learn more about how these new provisions can help you maximize current year tax savings for you and your business.

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