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Tax Bill's Impact to Vary Greatly Among Sectors : Heavy Manufacturing and Real Estate Seen Hard Hit; Technology, Retailing Win

August 18, 1986|TOM FURLONG

The sweeping tax bill approved by congressional negotiators over the weekend is expected to have a dramatic impact on American industry. Heavy manufacturing and many real estate developers have railed against the loss of cherished tax incentives. But retailers and technology firms, which have long felt overtaxed, generally have cheered the move to lower overall corporate tax rates. While the enthusiasm of some early corporate tax-reform advocates has waned, some opponents have found the process less painful than anticipated.

With approval of a final bill by Congressional negotiators--and expected approval next month by the full House and Senate--American business is now bracing for this massive overhaul of the nation's tax system. Here is a look at how various industries will be affected:

Real Estate

The tax bill rewrites some basic rules of real estate investment, with the impact expected to ripple through the economy for years, real estate experts say.

The bill curbs most of the tax benefits now enjoyed by limited real estate partnerships, which in recent years have poured money into apartment and office building construction. These partnerships, popular with affluent investors seeking to shelter income, invested nearly $13 billion in real estate last year.

The bill strikes at the heart of these investment partnerships by preventing investors from deducting losses on the partnerships against their other income. Deductions from partnerships already in operation will be phased out over five years.

Partnership losses may only be used to offset income from similar investments. That means investors may deduct losses from income on other passive real estate partnerships but not on the money that they earn from their primary jobs.

The bill also imposes stricter rules on depreciation and stretches out depreciation schedules from 19 years to 27 1/2 years for rental housing and 31 1/2 years for commercial property. Just the prospect that the bill will pass has put thousands of building projects on hold and dried up investor funds going into tax shelter partnerships.

Bill opponents also say the legislation will raise apartment rents because it will reduce the supply of new apartments. It will also depress the value of income-producing property because tax treatment plays a large role in determining market price, they say.

Further, they point out, the bill may lead to increased bank failures because real estate foreclosures and defaults will rise as projects become less financially viable.

Yet, other real estate investors applaud the bill because they feel it will cut overbuilding and drive out marginal operators. Future real estate deals, they say, will involve less debt, more equity and real returns on investment. Present tax law allows investors in these partnerships to report paper losses through deductions on accelerated depreciation and interest payments on borrowed money.

Limited real estate partnerships are often blamed for fueling real estate construction activity that defies conventional economics of demand and supply. A recent study by Salomon Bros., for example, points out that the United States now has enough empty office space to last up to seven more years.

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