The Protect Americans From Tax Hikes (PATH) Act was signed into law days ago by President Obama, a bill that rolls together a great many
temporary IRS rules and makes them permanent. Included in the long list — viewable in some detail entirety at the always-detailed JD Supra law blog — are the rules for cost recovery on certain types of real property. These rules speak to the time it takes from an asset to move in value from its purchase price to its salvage value, a process also known as depreciation.
The relevant IRS regs are not fun reading by any stretch of the imagination – but they do speak to an important component in real property dealmaking, property management and leasing. Capital depreciation, when done inaccurately, can poison the performance of any property. The distinction between capital expenditures and business expenses is no small matter, and depreciation methods vary.
REIT Changes As Well
Depreciation isn’t the only topic on the table with the PATH Act. Also signed into law are permanent changes in areas including tax credits for new markets, renewable electricity, foreign investment. Additionally, the spinning off of REIT subsidiaries of property owning entities now has permanently adjusted rules that seem to make it tougher to shelter a company’s real property by spinning it off into a REIT and leasing back the assets. As David Miller and Jason Schwartz point out in their treatment of the PATH Act:
Under prior law, C corporations were able to spin off REITs (or elect REIT status after a spinoff). This was a popular technique for separating an operating company’s real estate assets into a tax-efficient REIT that would lease back substantially all of the real estate to the operating business (so-called “OpCo-PropCo structures”). Companies such as Penn National, Windstream and Darden adopted OpCo-PropCo structures. Recently, the IRS and the Treasury Department issued Notice 2015-59, which suggested significant restrictions on the ability of C corporations to separate their assets into a REIT. The PATH Act now generally bars tax-free spinoffs involving REITs except in two situations.
Setting aside the fact that opco-propco sounds like a delicious Eastern European soup, it seems a big page in the corporate playbook regarding the disposition of property has been rewritten significantly for 2016 and beyond.
Read the full PATH Act post at JD Supra Business Advisor. And remember: never act on tax law information without the benefit of fully qualified legal counsel.