Capital Gains


The appropriate level of taxation for capital gains (the amount realized when property held for investment is sold) has been a subject of tax policy debate throughout the history of the income tax. Capital gains have been taxed at rates well below the maximum tax rate for ordinary income for at least 50 years (with the exception of the period from 1986 – 1990). During the past 30 years that rate has ranged from a high of 49% to the current rate of 15% - due to the passage of the Jobs and Growth Tax Relief Reconciliation Act of 2003, also known as the “Bush Tax Cuts.” The current rate is temporary and was originally set to expire at the end of 2010 but has been subsequently extended through the end of 2012. When capital gains tax rates were reduced to 15% from 20% in 2003, the depreciation recapture rate remained at 25%. Prior to 1997, depreciation recapture amounts were taxed at the same rate as capital gains.

In 2013, President Obama signed the American Taxpayer Relief Act of 2012 into law. Although the Act made many of the tax cuts permeant, some modifications were made. For those with income over $400,000 the top marginal tax rate on long-term capital Gaines was raised from 15% to 20%.


IREM believes that it is in our nation’s best interest for Congress to encourage real estate investment in the United States by creating a tax system that recognizes inflation and a tax differential in the calculation of capital gains from real estate; while stimulating economic investment; and consequently, leveling the playing field for those who choose to invest in commercial real estate.

(Adopted: 6/97. Updated: 4/03, 10/08, 9/12, 10/17)

Carried Interest


Most real estate partnerships, particularly those engaged in real estate development, are organized with general partners, who contribute their expertise (and, occasionally, some capital) and limited partners who contribute money and property (capital) to the enterprise. Generally the profits of the partnership are divided primarily among the limited partners who contribute capital. A common practice among real estate partnerships, however, is to permit the general partner to receive some of the profits through a "carried interest," even when the general partner has contributed little or no capital to the enterprise. The general partner's profits interest is "carried" with the property until it is sold.

During the time that the real estate is held, the general partner receives compensation in the form of ordinary income. The limited partners receive both ordinary income from operations and capital gains income from any profits generated during the year. When the property is sold, the limited partners receive their profits distributions (the earnings on the capital they have invested) as capital gains. The general partner also receives the value of its carried interest as capital gains income.

In recent years, Congress has proposed treating the income from the carried interest as ordinary income. Legislation would treat all income from a carried interest of a real estate partnership (and other types of investment partnerships, as well) as income from services, subject to ordinary income tax rates. Typically in many pieces of legislation, the tax rate on income from a carried interest would increase, from 15% to a maximum of approximately 35%.

A carried interest is designed to act as an incentive for a general partner to maintain and enhance the value of the real estate so that the operation of the property is a value-added proposition. The issue of carried interest is critical to both the recovery of commercial real estate, as well as the overall economic recovery. Under the American Tax Payer Relief Act of 2012, carried interest will increase to 20 percent for individuals with an adjusted gross income more than $400,000 and married couples with AGI more than $450,000. Individuals/couples below the $400,000/$450,000 AGI level will pay 15 percent on carried interest. This legislation is effective as of January 1, 2013.


IREM opposes any proposal that would eliminate capital gains treatment for any carried interest of a real estate partnership.

(Adopted 10/07, updated 10/09, 10/13, 8/15)



The Economic Recovery Tax Act of 1981 created a depreciable life of 15 years for all real property placed in service after December 31, 1980. The depreciable life for property placed in service after March 15, 1984 was extended to 18 years and for property placed in service after May 8, 1985, the depreciable life was extended to 19 years. Depreciation rules changed again when the tax reform act of 1986 was enacted. The depreciable life of a non-residential property changed to 31.5 years and the depreciable life of a residential property changed to 27.5 years.

Yet again, the enactment of the 1993 tax act changed depreciable life for a nonresidential building to 39 years (residential property remained at 27.5 years). The 39-year depreciation life applies to properties placed in service on or after May 13, 1993.

The extension of the depreciable life to 39 years was intended to be in return for favorable passive loss tax law and other tax law changes in 1993. Unfortunately, (see position on passive loss) the Internal Revenue Service (IRS) did not interpret the 1993 law in such a way to be favorable to commercial real estate thereby eliminating almost any benefit to the commercial real estate industry.

In 2010, President Barack Obama signed into law the “2010 Tax Relief Act” which allowed for 100% bonus depreciation for part of 2010 and all of 2011 on qualifying assets. Furthermore, the law allowed for 50% bonus depreciation through 2012. Also, it temporarily extended 15-year depreciation recovery period for leasehold improvements through 2011.

In 2015, the Protecting Americans from Tax Hikes Act of 2015 (PATH Act) was signed into law. The PATH Act further extended bonus depreciation through 2019 and made the 15-year depreciation recovery period for leasehold improvements permanent.


The current 39-year time frame does not accurately reflect the useful life of a building and its components. IREM supports depreciation reform for nonresidential and residential real estate that secures a significantly shorter cost recovery period for commercial real estate without adding complexity or creating artificial acceleration of deductions, and specifically:

  • Upon recognition of capital gain, taxpayers should be able to use sales costs to first reduce the depreciation recapture portion of the gain;
  • Suspended losses should also go to reduce depreciation recapture;
  • An installment sale as gain is recognized over a period of time, that a percentage of gain from appreciation and depreciation recapture be used in reporting gain;
  • A partially tax deferred exchange, gain from appreciation, and depreciation recapture should be reported on an allocated percentage basis.

Any other proposed regulation that affects the reporting of capital gain by commercial, industrial or investment real estate taxpayers be reported in the most advantageous manner for the taxpayer:

IREM is pleased that the National Association of REALTORS® (NAR) also supports a depreciable life for real estate that accurately reflects the economic life of the property. IREM requests NAR to assist IREM in lobbying for the adoption of favorable regulations.

(Adopted: 4/03. Updated: 10/08, 9/12, 10/17)

Expensing of Security Equipment


Businesses spend countless dollars increasing and improving building security. Petty crime and vandalism are no longer the biggest threats to our security. Property owners and businesses are working to protect American’s workforce and the physical assets of our country. Buildings of all types and sizes are undergoing this effort, at significant expense to improve and install security detecting and protection equipment. Deductions include all directly expensed security equipment/systems as well as maintenance expenses associated with them. Supplies necessary to operate a security program such as uniforms, batteries, control forms, access cards, etc. Building owners across the country report that their security related operating budgets have increased substantially and are still climbing. These expenses currently are deducted over a 5-7 year period.


IREM supports the expensing of security equipment in the year it is placed in service. Security improvements benefit all those who work, shop, or visit the property, as well as those in surrounding properties; therefore, they should be fully deductible under the U.S. tax code.

(4/03, confirmed 10/06, updated 3/11, 5/17)

Federal Taxation

Any tax revisions or increases enacted by the Congress should encourage savings and investment. Further, we urge Congress to:

  • reject or repeal discriminatory provisions which limit and/or disallow the traditional deductions of certain interest expenses and real property taxes, investment interest deductions and deductions for interest and taxes paid during the construction period of a project;
  • strengthen the depreciation and recapture provisions applicable to the sale of real property by rejecting or repealing discriminatory provisions which limit or disallow existing deductions and by making subject to recapture only that portion of depreciation taken that exceeds straight line depreciation;
  • make permanent rapid amortization provisions for rehabilitation of low-income housing;
  • maintain workable laws providing for the use of tax-exempt mortgage revenue and industrial development bonds while assuring that the program does not unduly compete with or replace the private marketplace;
  • enact provisions which would disallow or adversely limit losses sustained through accounting procedures;
  • enact legislation to allow owners who directly convert buildings to condominiums and cooperatives to qualify for full capital gains tax treatment;
  • maintain a graduated investment tax credit available for old and historic structures; and
  • reject proposals for enactment of a flat tax or other alternative taxation systems that serve as a disincentive for investment in real estate by limiting or repealing traditional real estate-related tax deductions for; mortgage interest, state and local property taxes, depreciation, capital gains, and other operating and business expenses.

(6/86, updated 4/05, 10/09, 4/13)

The Federal Budget and Monetary Policy

We support the principle and concept of reaching a balanced budget in all political jurisdictions. Balanced state, local, county and national budgets should be maintained by reducing unnecessary expenditures and by sun-setting, capping and/or reducing the growth of programs and services that are not essential.

Stimulation of employment, growth of productivity, and inflation control are absolutely essential.

Accordingly, we urge policies that encourage savings and capital investment in housing structures, and equipment. We believe that a restrictive monetary policy should be used against inflation only to the extent necessary to supplement rigorous fiscal responsibility. Tight money policies are discriminatory in their nature, striking first and hardest at long-term mortgage credit for housing and smaller business investments without regard to their economic importance in national priorities.

Tax increases should be considered only if all spending reductions prove insufficient to significantly reduce deficits and any such increases must not create disincentives to savings and investment. In the case of a budget surplus, excess funds should be used for tax and/or debt reduction. A program to reduce the national debt must be formulated and implemented. Congress should exercise fiscal discipline by eliminating wasteful and unnecessary spending.

(6/86, updated 4/03, 10/08)

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