When

Congress begins to consider federal tax legislation, most

industries, like a bride-to-be planning for her wedding,

put together their "wish" lists. Many also put

together a "needs" list that they hope might be

more in line with what is possible.

As Congress

takes up tax legislation this summer, the real estate

industry is no different than most others in that it has

some timely advice for those who will write the bill.

However, real estate's wish list is unusually brief and

it contains items that our industry truly needs.

This year,

real estate, as represented by the National Association

of Realtors, "The Voice for Real Estate," has

just two items on its wish list: a reduced cost recovery

period for tenant improvements made in commercial

properties and a reduction in the depreciation recapture

rate if capital gains taxes are cut.

Why should

ordinary citizens care about complex rules for commercial

real estate? They ought to care because deteriorating

commercial space leads to declining values in a

community's overall real estate stock.

Healthy and

competitive office and retail space keeps a community

lively, growing and vibrant. Tax laws affect investment,

and investment affects communities.

Both of

these policy priorities for real estate speak to genuine

need and also to fairness.

A reduction

in the cost recovery period on commercial property tenant

improvements would help existing office buildings and

other types of commercial real estate remain more

competitive in commercial property markets that remain

tight around much of the United States.

A Grubb and

Ellis Real Estate Services report recently noted that

commercial construction in the nation's suburbs currently

outpaces commercial building in the cities by a factor of

nearly eight to one. Consider that for a minute.

Generally speaking, the office properties one sees in

suburban areas usually are newer than much urban office

space. The fact that there is less demand for new urban

office space suggests that older commercial property

stock is having difficulty competing with newer stock.

quick-and-dirty review of depreciation rules shows one

reason why this is so. At present, if the owner of an

office building makes specified improvements, such as

updating telecommunications wiring, supplying cable or

installing new carpeting, to win a new tenant, these

improvements must be written off over a 39-year

depreciation period.

Neither

these improvements nor the underlying leases are likely

to last as long as the 39-year recovery period. Because

the improvements are affixed to the structure, however,

they are treated as real estate, and the 39-year recovery

period applies. These rules bear no relation to economic

reality. Reducing the recovery period for leasehold

improvements, therefore, will match more closely to the

actual life of both the improvements and the duration of

the lease.

The current

depreciation rules for capital gains pose a similar

problem for those who invest in real estate. In 1997, a

capital gains tax cut was enacted, reducing the top rate

on gains from the sale of an investment from 28 percent

to 20 percent. Unfortunately, Congress and the White

House agreed to reduce the top tax rate on prior

depreciation of real property from 28 percent to only 25

percent. What that meant was that real estate, in effect,

did not get the same capital gains cut as most other

types of investments. Investment real estate is taxed at

a higher rate than stocks and bonds when sold.

In asking

for a rate cut on depreciation recapture, real estate is

not asking Washington for "special" treatment.

It's actually just the opposite.

Reducing

the tax rate on prior depreciation simply would put

investments in real estate on equal footing with other

types of investment.

Reality and

fairness... that's what comprises real estate's wish list

for the upcoming tax bill.

(The

Fayette County Board or Realtors is one of more than

1,800 local boards and associations of Realtors that

comprise the National Association of Realtors. As the

nation's largest trade association NAR is "The Voice

for Real Estate," representing nearly 750,000

members involved in all aspects of the real estate

industry. The Fayette County Board of Realtors can be

contacted by calling 770-461-2401.)

<!--

-----------