I find it very curious that the fiscal cliff was not a topic of any of the presidential debates of 2012. It was not mentioned by the candidates or the moderators. Yet within a week of the election results, it seems as though everyone has heard of the looming fiscal cliff and the black hole that lies beneath it. Ignorance may be bliss, but the unknown can be downright scary. Right now, most of us are staring into the black hole and wondering how this country will address the growing national deficit and in particular, how inevitable changes in tax policy and accounting rules will affect us in 2013 and beyond.
So let’s take a look at some tax issues that will specifically impact the commercial real estate industry. Back in 2011, I wrote a two-part article about plans that the Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) have to revise guidelines related to the accounting of leases – specifically, they plan to eliminate the concept of an off balance sheet operating lease. Their objective is to ensure that assets and liabilities arising as a result of operating leases are recognized on financial statements.
The process for making this kind of guideline change can be a long one. In fact, discussions about this started pre-recession, in 2006, and the occurrence of the recession-fueled comments that the impact of the guidelines could be devastating for certain industries already hit hard by the economic downturn. While FASB and the IASB responded to the outpouring of feedback by revising proposals and re-exposing these for comment, it seems a foregone conclusion that some form of the rule change will occur. Though the implementation date for the new guidelines has not been determined and isn’t likely to occur until 2015 or 2016, it is important to note that existing lease arrangements will not be grandfathered. Unless something unanticipated happens to derail this effort, this is going to have a major impact on the structure of leases and how companies evaluate the lease vs. buy decision.
While the FASB/IASB lease accounting guideline change will have the greatest impact on companies issuing audited financial statements, let’s take a moment to consider another tax issue with a broader impact. Tied to new healthcare legislation, the “3.8 percent tax,” or the “Medicare tax,” is so-called because proceeds are to be dedicated to the Medicare Trust Fund. Beginning in 2013, individuals with AGI above $200,000 or couples filing jointly with AGI of more than $250,000 will pay a 3.8 percent tax on “some” interest, dividends, rents (less expenses) and capital gains (less capital losses). As a result, “some,” but not all, investment-related real estate transactions will be impacted.
Finally, there has been a lot of talk about doing away with the mortgage interest deduction. While not a tax increase, it certainly has a similar effect for all homeowners with a mortgage. More importantly, if this change is implemented, the effect it will likely have on the already fragile residential real estate market could prove catastrophic.
Stay tuned. I’ll be keeping an eye on these issues and keeping Daily News readers informed.
Henry Stratton, SIOR, CCIM, is vice president, brokerage services, specializing in office and industrial tenant representation for Colliers International Memphis.