Analysis of Economic Depreciation for Multi-Family Property

This paper uses a hedonic pricing model and National Council of Real Estate Investment Fiduciaries data to estimate economic depreciation for multi-family real estate. The findings indicate that investment grade multi-family housing depreciates approximately 2.7% per year in real terms based on total property value. This implies a depreciation rate for just the building of about 3.25% per year. With 2% inflation, this suggests a nominal depreciation rate of about 5.25% per year. Converted into a straight-line depreciation rate that has the same present value, this suggests a depreciable life of 30.5 years - as compared to 27.5 years allowed under the current tax laws. Thus, these laws are slightly favorable to multi-family properties by providing a tax depreciation rate that exceeds economic depreciation, which is in part due to inflation that has been less than expected during the past decade.

Technical report (Texas A & M University. Real Estate Center)

Technical report the summarizes the major sections of the 1993 Tax Act that affect the real estate market

Tax legislation of 1976 and 1978 : an analysis of its effects on the rates of return of income-producing real estate

Vita.For many years, real estate investments were treated quite benevolently by the tax statutes. Although many of the pre-1964 tax benefits were severely reduced by the tax legislation of 1964, 1969 and 1976, the Revenue Act of 1978 serves to restore a significant portion of the real estate investment tax incentives of earlier years. The purpose of the study is to analyze the combined impact of the Tax Reform Act of 1976 and the Revenue Act of 1978 along with two recently debated tax law changes on the internal rates of return and optimal holding periods of selected income-producing properties (other than low-income housing). Two generalized deterministic computer simulation models address a total of 864 different sets of assumptions pertaining to the character and size of an investor's pre-investment income and varied uses of component and composite depreciation methods in light of the pre-Tax Reform Act provisions and the post-Revenue Act provisions. The two recently debated tax law changes considered are in the areas of capital gains treatment and allowable accelerated depreciation alternatives. Several general conclusions based upon the findings of the study are as follows: 1. The net impact of the 1976 and 1978 tax Acts is generally very minor for many investors in commercial and residential properties (other than low-income housing). 2. The Congressional intent for the 1976 and 1978 tax changes included in this study is not supported by that legislation if the Acts are considered collectively rather than individually. 3. Compounded rates of change in net operating income and property value as small as two percent can cause dramatic changes in the after-tax internal rates of return and optimal holding periods of income-producing real estate. 4. No variation in the depreciation method nor the tax bracket level of an investor can cause a project to be a viable investment if that project is unsound from an economic standpoint. 5..

Tax legislation of 1976 and 1978 : an analysis of its effects on the rates of return of income-producing real estate

Vita.For many years, real estate investments were treated quite benevolently by the tax statutes. Although many of the pre-1964 tax benefits were severely reduced by the tax legislation of 1964, 1969 and 1976, the Revenue Act of 1978 serves to restore a significant portion of the real estate investment tax incentives of earlier years. The purpose of the study is to analyze the combined impact of the Tax Reform Act of 1976 and the Revenue Act of 1978 along with two recently debated tax law changes on the internal rates of return and optimal holding periods of selected income-producing properties (other than low-income housing). Two generalized deterministic computer simulation models address a total of 864 different sets of assumptions pertaining to the character and size of an investor's pre-investment income and varied uses of component and composite depreciation methods in light of the pre-Tax Reform Act provisions and the post-Revenue Act provisions. The two recently debated tax law changes considered are in the areas of capital gains treatment and allowable accelerated depreciation alternatives. Several general conclusions based upon the findings of the study are as follows: 1. The net impact of the 1976 and 1978 tax Acts is generally very minor for many investors in commercial and residential properties (other than low-income housing). 2. The Congressional intent for the 1976 and 1978 tax changes included in this study is not supported by that legislation if the Acts are considered collectively rather than individually. 3. Compounded rates of change in net operating income and property value as small as two percent can cause dramatic changes in the after-tax internal rates of return and optimal holding periods of income-producing real estate. 4. No variation in the depreciation method nor the tax bracket level of an investor can cause a project to be a viable investment if that project is unsound from an economic standpoint. 5..

Federal Income Taxes, Inflation and Holding Periods for Income-Producing Property

This paper investigates the question of tax-induced holding periods for income-producing property, and whether such periods are influenced by selection of depreciation methods and inflation. Also, given that selection of depreciation methods are a function of holding periods, the magnitudes of benefits associated with selection of depreciation methods are examined. These issues are considered for investors affected by the regular minimum tax and the maximum tax as well as those unaffected by such provisions. Copyright American Real Estate and Urban Economics Association.