FEDERAL TAX LEGISLATION
By NMHC

Extension of Expiring Tax Provisions. In one of its final acts before adjourning for the year, Congress passed the Tax Relief and Health Care Act of 2006 (P.L. 109-432). The measure, which was signed into law on December 20, provides $45.1 billion in tax breaks for individuals and businesses and retroactively restores some popular expired tax cuts, including the state sales tax deduction, the above-the-line deduction for higher education tuition and fees, the research and development credit and the 15-year amortization of leasehold improvements.

The bill extends and expands a provision allowing the immediate expensing of environmental cleanup costs. The provision, which actually expired at the end of 2005, is extended retroactively through 2007 and now makes petroleum cleanup costs eligible for expensing.

In addition, as NMHC/NAA urged, Congress agreed to a one-year extension of the energy efficiency tax incentives enacted in 2005 for buildings. The provision extends the deduction to property placed in service prior to January 1, 2009.

Private Mortgage Insurance Deduction. On the downside, however, the package also includes a provision opposed by NMHC/NAA to allow a limited deduction for the cost of private mortgage insurance (PMI) for certain taxpayers.

Despite this temporary setback, NMHC/NAA believe the impact of the PMI deduction will be very limited. In response to concerns raised by NMHC/NAA, the measure is in effect for only one year, and it applies only to taxpayers with incomes up to $100,000 who itemize their tax deductions.

The legislative struggle over the PMI incentive will continue into the new Congress, since its backers are expected to seek permanent status for the provision. NMHC/NAA are already working with key members of Congress to oppose such an extension. In addition, the “pay-as-you-go” rules expected in the next Congress will force PMI proponents to develop a way to finance or “pay” for any extension.

Finally, we expect the new Congress to have greater understanding and appreciation of the importance of renters and rental housing in the overall national housing policy.

IRS GUIDANCE

Allocation of Partnership Liabilities to Owners of Disregarded Entities. On October 11, 2006, the Treasury Department and the Internal Revenue Service (IRS) issued final regulations under Internal Revenue Code (IRC) Section 752 regarding the allocation of partnership liabilities to owners of disregarded entities that hold partnership interests. Under the final regulations, an obligation of such disregarded entity to make a payment with respect to such partnership liability (e.g., a guarantee of the partnership liability) is taken into account only to the extent of the disregarded entity's net value. Although the preamble to the final regulations notes that the existing anti-abuse rule in the IRC Section 752 regulations “can apply to abusive transactions involving thinly capitalized entities,” the final regulations do not extend to entities regarded for federal tax purposes (i.e., the final regulations do not apply to a thinly capitalized corporation or partnership that owns a partnership interest). The final regulations generally apply to liabilities incurred or assumed by a partnership on or after October 11, 2006.

Sale-In, Lease Out Relief for Partnerships. On December 14, 2006, in Notice 2007-4, the IRS extended for one year the transition relief provided to partnerships and other pass-thru entities that are treated as holding tax-exempt use property as a result of the application of IRC Section 168(h)(6). Relief was first provided in Notice 2006-2, (I.R.B. 2006-2, 278), for tax years beginning before January 1, 2006. That deadline has now been extended to tax years beginning before January 1, 2007. Abusive transactions involving partnerships and other pass-thru entities remain subject to challenge by the IRS under other provisions of the tax law.

Like-Kind Exchanges. In Private Letter Ruling 200631012 (released August 4, 2006), the IRS ruled that an exchange of stock held in cooperative apartments for improved and unimproved realty qualifies as a like-kind exchange under IRC Section 1031 because stock in a cooperative housing corporation is considered real property under New York state law.

Accounting Methods. On October 10, 2006, the IRS published final regulations (TD 9283) on the additional first-year bonus depreciation allowance for certain modified accelerated cost recovery system (MACRS) property and computer software under IRC Sections 168(k) and 1400L (IRB 2006-41, October 10, 2006).
Effective August 31, 2006, the regulations adopt, with certain changes, the proposed regulations published in 2003. Specifically, they enumerate the requirements that must be met to qualify for the bonus depreciation allowance and provide guidance related to the computation of such allowance.

Effective August 31, 2006, the regulations adopt, with certain changes, the proposed regulations published in 2003. Specifically, they enumerate the requirements that must be met to qualify for the bonus depreciation allowance and provide guidance related to the computation of such allowance.