A299

An Act allowing gross income tax deductions for a measure of inflation and growth in the value of certain property dispositions, supplementing Title 54A of the New Jersey Statutes.

Be It Enacted by the Senate and General Assembly of the State of New Jersey:

1. a. (1) For dispositions of property occurring in the first five calendar years beginning on or after the date of enactment of this section, if a taxpayer’s gross income for a taxable year includes a net gain or income from the disposition of property pursuant to subsection c. of N.J.S.54A:5-1, the taxpayer shall be allowed a deduction to the extent that the taxpayer’s economizing adjusted aggregate basis for the taxable year exceeds the taxpayer’s aggregate adjusted basis.

(2) (a) The deduction allowed pursuant to this section for a taxable year shall not exceed the taxpayer’s amount of net gain or income from the disposition of property includible pursuant to subsection c. of N.J.S.54A:5-1 and occurring in the portion of the taxable year coinciding with the first five calendar years beginning on or after the date of enactment of this section.

(b) The deduction allowed pursuant to this section for a taxable year shall not apply to the taxpayer’s amount of net gain or income from the disposition of property includible pursuant to subsection c. of N.J.S.54A:5-1 and occurring in the portion of the taxable year coinciding with the first five calendar years beginning on or after the date of enactment of this section , which is attributable to the portion of the amount realized on a disposition of secondary residential real property that represents gain in excess of $300,000.

c. As used in this section:

“Aggregate adjusted basis” means the total adjusted basis used for federal income tax purposes and adjusted pursuant to subsection c. of N.J.S.54A:5-1 for determining net gain or income from the disposition of property for the portion of the taxable year coinciding with the first five calendar years beginning on or after the date of enactment of this section.

“Economizing adjusted aggregate basis” means the product of the aggregate adjusted basis multiplied by the sum of one plus the economizing rate average, compounded on an annual basis based on the total number of calendar quarters for which all property taken into account for purposes of computing aggregate adjusted basis for the taxable year has been held by the taxpayer.

“Economizing rate average” means the weighted average economizing rate for all property used in determining aggregate adjusted basis for the calendar quarters for which the property has been held by the taxpayer in proportion to the fair market value of the property on the date of disposition.

“Economizing rate” means the rate of interest imposed by the Director of the Division of Taxation pursuant to R.S.54:49-3 for the calendar quarter for which the property has been held by the taxpayer, except that for calendar quarters for which property has been held before July 1, 1993 the Director of the Division of Taxation shall prescribe a rate which is derived in a method substantially equivalent to the method used pursuant to R.S.54:49-3 on or after July 1, 1993.

“Secondary residential real property” means residential real property in this State that does not qualify as the taxpayer’s principal residence for purposes of the gross income tax exclusion allowed pursuant to section 1 of P.L.1998, c.3 (C.54A:6-9.1).

2. a. (1) For dispositions of secondary residential real property occurring in the first five calendar years beginning on or after the date of enactment of this section, if a taxpayer’s gross income for a taxable year includes a net gain or income from the disposition of property includible pursuant to subsections b., k., or p. of N.J.S.54A:5-1, the taxpayer shall be allowed a deduction to the extent that the taxpayer’s economizing adjusted aggregate basis for the taxable year exceeds the taxpayer’s aggregate adjusted basis.

(2) (a) The deduction allowed pursuant to this section for a taxable year shall not exceed the taxpayer’s amount of net gain or income from the disposition of secondary residential real property includible pursuant to subsections b., k., or p. of N.J.S.54A:5-1 and occurring in the portion of the taxable year coinciding with the first five calendar years beginning on or after the date of enactment of this section.

(b) The deduction allowed pursuant to this section for a taxable year shall not apply to the taxpayer’s amount of net gain or income from the disposition of secondary residential real property includible pursuant to subsections b., k., or p. of N.J.S.54A:5-1 and occurring in the portion of the taxable year coinciding with the first five calendar years beginning on or after the date of enactment of this section, which is attributable to the portion of the amount realized on a disposition of secondary residential real property that represents gain in excess of $300,000.

c. As used in this section:

“Aggregate adjusted basis” means the total adjusted basis used for federal income tax purposes and adjusted pursuant to the “New Jersey Gross Income Tax Act,” N.J.S.54A:1-1 et seq., for determining net gain or income from the disposition of secondary residential real property for the portion of the taxable year coinciding with the first five calendar years beginning on or after the date of enactment of this section.

“Economizing adjusted aggregate basis” means the product of the aggregate adjusted basis multiplied by the sum of one plus the economizing rate average, compounded on an annual basis based on the total number of calendar quarters for which all secondary residential real property taken into account for purposes of computing aggregate adjusted basis for the taxable year has been held by the taxpayer.

“Economizing rate average” means the weighted average economizing rate for all secondary residential real property used in determining aggregate adjusted basis for the calendar quarters for which the property has been held by the taxpayer in proportion to the fair market value of the property on the date of disposition.

“Economizing rate” means the rate of interest imposed by the Director of the Division of Taxation pursuant to R.S.54:49-3 for the calendar quarter for which the secondary residential real property has been held by the taxpayer, except that for calendar quarters for which secondary residential real property has been held before July 1, 1993 the Director of the Division of Taxation shall prescribe a rate which is derived in a method substantially equivalent to the method used pursuant to R.S.54:49-3 on or after July 1, 1993.

3. On or before the date of Governor’s Budget Message pursuant to section 11 of P.L.1944, c.112 (C.52:27B-20) occurring in the fifth calendar year beginning after the date of enactment of P.L. , c. (C. ) (pending before the Legislature as this bill), the Director of the Division of Taxation shall transmit a report to the Legislature, in accordance with section 2 of P.L.1991, c.164 (C.52:14-19.1), and the Governor that addresses the effectiveness of the deductions provided by P.L. , c. (C. ) (pending before the Legislature as this bill) in catalyzing economic activity, particularly with respect to the New Jersey real estate market. The report shall include, but not be limited to, an estimate of the annual amount of economic activity generated by the deductions, an estimate of the deductions’ annual economic impact upon the New Jersey real estate market, the State’s annual revenue impact associated with the deductions, recommendations for the renewal or expiration of the deductions, and any other information the director deems relevant.

4. This act shall take effect immediately.

STATEMENT

This bill is designated as “The Revitalizing the New Jersey Real Estate Market and Economy Act.” The bill allows gross income tax (GIT) deductions for a measure of inflation and growth in the value of certain property dispositions for a five-year period. The bill reduces the taxable exposure of personal property dispositions to those true ascensions to wealth that exceed inflation and measured rates of growth. The bill also encourages individuals and businesses, subject to the GIT, to purchase, renovate, and resell distressed residential properties so as to generate the economic activity associated with a robust real estate market from what may otherwise be idle residential property.

The bill allows two deductions. The first deduction applies to personal property dispositions. The second deduction applies to business property dispositions of secondary residential property, subject to the GIT. Both of the bill’s deductions are allowed in an amount of property disposition income that reflects a measure of inflation and growth in the adjusted basis of the qualified property disposed. Referred to as the economizing rate, the bill’s measure of inflation and growth is three percentage points above the Federal Reserve’s prime bank lending rate.

The scope of property disposition income subject to deduction under the bill varies based on the origin of the income. Personal property disposition income is entirely subject to deduction. Business property disposition income reported through the GIT is only subject to deduction to the extent of secondary residential property disposition income. However, both deductions are inapplicable to the portion of gains in excess of $300,000 that are attributable to a disposition of secondary residential property.

To determine the amount of a deduction, a taxpayer may make the following calculation:

1. Determine the average economizing rate (Federal Reserve’s Bank Prime Loan Rate + Three) for each piece of qualifying property disposed of for the taxable year. This average is calculated based on the economizing rate for each calendar quarter for which a piece of property is held by the taxpayer or the taxpayer’s business.

2. In proportion to the fair market value of each piece of qualified property on the date of disposition, calculate the weighted average economizing rate for all qualified properties disposed of during the taxable year. This weighted average is defined as the economizing rate average.

3. Multiply the aggregate adjusted basis for all qualified properties disposed of for the taxable year by the sum of one plus the weighted average calculated in step two, compounded on an annual basis based on the total number of calendar quarters for which all qualified properties disposed of during the taxable year have been held by the taxpayer. This calculation produces the economizing adjusted aggregate basis.

4. Determine the excess of the product calculated in step three over the aggregate adjusted basis for all qualified properties disposed of for the taxable year.

5. The deduction is available to the extent the taxpayer’s qualified property disposition income for the taxable year is equal to or less than the amount calculated in step four, subject to limitation. The deduction is limited to the taxpayer’s amount of qualified property disposition income subject to the deduction calculation, minus the amount of gain on a disposition of secondary residential property in excess of $300,000.

The bill’s deductions are scheduled to apply to qualified property dispositions occurring in the first five calendar years beginning on or after the date of enactment. To enable the Legislature’s determination of whether to renew or discontinue the deductions, the bill requires the Division of Taxation to provide a report detailing the economic impacts of the deductions. The report is due on or before the date of the Governor’s budget message during the deductions’ last scheduled year of availability.