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.

A 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.)

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