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Monte A. Jackel and John J. Rooney *
This article summarizes the changes made by the Taxpayer Relief Act of 1997 that have significant effects on real estate transactions. It describes the law that applied before the legislation was enacted, as well as the new provisions. Topics covered include: revised treatment of capital gains, estate tax exclusions of qualified family businesses, changes affecting the home office deduction, expensing of environmental remediation costs, changes to various partnership provisions, treatment of international joint ventures, and modifications of the rules for real estate investment trusts. All of these topics are discussed in detail in the Tax Management Portfolios Real Estate Series.
The Taxpayer Relief Act of 1997 (the Act),' signed into law on August 5, 1997, includes numerous tax cuts and offsetting revenue raisers, some of which are retroactive. The more significant changes in the Act that affect the real estate industry and its investors are discussed below.
CAPITAL GAINS PROVISIONS
Maximum Rate of Tax on Net Capital Gain of Individuals
Under the Act, for sales and exchanges (and installment payments received) after May 6, 1997, the maximum rate of tax on the net capital gain of an individual is reduced from 28% to 20%.2 The lower capital gains rates do not apply to the sale or exchange of assets held for 18 months or less, effective for amounts properly taken into account after July 28, 1997. The 28% maximum rate will continue to apply to the sale or exchange of capital assets held more than one year but not more than 18 months after that date.
The tax on the net capital gain attributable to any long-term capital gain from the sale or exchange of collectibles remains at a maximum rate of 28%. Any long-term capital gain from the sale or exchange of sec 1250(3) property (i.e., depreciable real estate) to the extent the gain would have been treated as ordinary income if the property had been sec 1245 property, is taxed at a maximum rate of 25%.
In addition, for taxable years beginning after December 31, 2000, the maximum capital gains rate for assets which are held more than five years is 18% (rather than 20%). The 18% rate will only apply to...