Michael Gray, CPA's Real Estate Tax Letter

November 24, 2015

© 2015 by Michael C. Gray
ISSN 1930-0387

A monthly report focusing on tax issues for the homeowner and real estate investor.

Congress passed the Protecting Americans from Tax Hikes Act of 2015 (PATH) last Friday, December 18, and President Obama immediately signed it on the same day.

Some good news for the extension legislation is that several provisions were made permanent, which will make it easier to plan federal income taxes (until Congress changes the laws again).

Permanent extensions for individuals

Here is a partial list of individual extenders that were made permanent:

1. State and local sales tax deduction. This deduction is an alternative to the itemized deduction for state income taxes. It mostly benefits residents of states that don't have an income tax, such as Texas, Nevada and Washington.
2. American Opportunity Tax Credit. This is a tax credit of up to $2,500 per eligible student per year for college students, which was scheduled to expire after 2017. The credit is subject to phase out based on adjusted gross income. Although the research credit was made permanent in the Protecting Americans from Tax Hikes of 2015 (PATH) legislation enacted on December 18, 2015, the rate for the alternative simplified credit was NOT increased from 14% to 20%. This was a proposal that was eliminated from the final Act.
3. Teacher's classroom expense deduction. The $250 maximum deduction will be indexed for inflation, starting in 2016. Some professional development expenses will also be eligible for the deduction, effective for tax years beginning after December 31, 2015.
4. Charitable distributions from IRAs. The ability to make annual tax-free distributions of up to $100,000 to a charitable organization by individuals age 70 1/2 and older.

Two-year extensions for individuals

Here is a partial list of items extended for two years through 2016 for individuals:

1. Qualified tuition deduction for qualified tuition and fees for post-secondary education. The maximum deduction is $4,000, and the deduction is phased out based on adjusted gross income.
2. Mortgage debt exclusion. The exclusion from taxable income cancellation of mortgage debt incurred for the acquisition or improvement of a principal residence. The maximum qualified mortgage balance before cancellation is $2 million.
3. Mortgage insurance premium deduction as mortgage interest, subject to phase out based on adjusted gross income.

Permanent extenders for businesses

1. The increased expensing limit of $500,000 under Internal Revenue Code Section 179, subject to phaseout when the total investment exceeds $2 million. An expense allowance relating to qualified real property was also made permanent, and the $250,000 cap for this type of property was eliminated, effective for acquisitions after 2015. The eligibility of off the shelf computer software for the expense election was also extended.
2. The research tax credit was made permanent. This is a huge item for tech companies. The alternative simplified credit was increased from 14% to 20%.
3. The 100% gain exclusion of gain from the sale or exchange of qualified small business stock held more than five years. (Different percentage exclusions will continue to apply for stock acquired in some years before 2016.)
4. The five-year recognition period for built-in gain following the conversion of an S corporation to a C corporation was made permanent. (Formerly, the recognition period was ten years.)
5. 15-year straight-line cost recovery (depreciation) for qualified leasehold improvements, restaurant property and retain improvements.
6. The basis adjustment for stock of an S corporation for donations of appreciated property.

Five-year extenders for businesses

1. First-year bonus depreciation will be 50% for 2015-2017, 40% for 2018, 30% for 2019 and then expire.
2. The Work Opportunity Tax Credit is extended through 2019.

Other extenders

1. The 10% Section 25C residential energy property credit is extended through 2016.
2. The residential solar energy credit is extended at 30% for property placed in service before January 1, 2020. For property placed in service after December 19, 2019 and before January 1, 2021, the percentage of the credit will be 26%. For property placed in service after December 31, 2020 and before January 1, 2022, the percentage of the credit will be 22%. After December 31, 2021, the credit will expire.

These are only a few highlights of the extender legislation. For more details, see your tax advisor, or call Michael Gray at 408-918-3161.

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