Tax, Budget and Related Issues

Ensuring a Growth-Oriented Tax Code through
Rational Real Estate Tax Policies
    

2018 Policy Issues SnapShot: 
More recent, detailed information on various tax policy issues can be found in recent issues of Roundtable Weekly — our weekly policy eNewsletter that can searched by key word or phrase.  The Roundtable's 2018 National Policy Agenda: A Building For the Future, also includes a section on Tax Policy.

See more details below on each policy issue:

Tax Reform

Tax Reform Implementation

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Updated news on various Tax policy issues can be found in recent issues of Roundtable Weekly — our policy eNewsletter archive that can searched by key word or phrase.

 Tax Reform Technical Corrections

• Opportunity Zones

Foreign Investment in Real Property Tax Act (FIRPTA)

Supreme Court Prepares to Rule on Constitutionality of Internet Sales Tax   

• Tax Incentives for Affordable Housing   

• Condominium Tax Accounting  

• Tax Regulations  

 
✓ Recent Developments:
⇒ 09/14/2018      Tax Policy
TAX POLICY - September 14, 2018 - Roundtable Weekly 
Ways and Means Passes “Tax Reform 2.0” Legislation; House GOP Leaders Plan September Floor Vote 
 
⇒ 09/07/2018      FIRPTA - Foreign Investment in Real Property Tax Act of 1980;Tax Policy
TAX POLICY - September 7, 2018 - Roundtable Weekly 
FIRPTA Repeal Bill Introduced; “Tax Reform 2.0” Mark-Up Next Week 

⇒ 08/17/2018      
TAX POLICY - August 17, 2018 - Roundtable Weekly 
Senate GOP Taxwriters Request Treasury Secretary Mnuchin to Clarify Cost Recovery Period for Real Estate Improvements 

⇒ 08/03/2018      Workforce and Low-Income Housing
WORKFORCE & LOW-INCOME HOUSING - August 3, 2018 - Roundtable Weekly 
Bipartisan Legislation Introduced to Create Task Force on Affordable Housing Policy 

⇒ 07/20/2018      Tax Policy
OPPORTUNITY ZONES - July 20, 2018 - Roundtable Weekly 
New Federal Opportunity Zones Profiled in Q&A with Roundtable Staff; House Speaker Ryan Touts Benefits of Investment Program 

⇒ 07/20/2018      Tax Policy
TAX POLICY - July 20, 2018 - Roundtable Weekly 
GOP House Leadership Plans Votes on “Tax Reform 2.0” in September; Technical Corrections Bill After Mid-Term Elections

 ⇒ 06/29/2018      Tax Policy
OPPORTUNITY ZONES - June 29, 2018 - Roundtable Weekly 
Roundtable Comment Letter Addresses Productive Real Estate Investment in New Opportunity Zones

⇒ 06/22/2018      Tax Policy
TAX POLICY - June 22, 2018 - Roundtable Weekly 
Six-Month Anniversary of Tax Reform Showing Success; House Ways and Means Committee Chairman Kevin Brady Awarded Roundtable’s “Champion of the Economy” Award 

⇒ 06/22/2018      Tax Policy
OPPORTUNITY ZONES - June 22, 2018 - Roundtable Weekly 
Treasury Designates More than 8,700 Census Tracts as Opportunity Zones - June 22, 2018 - Roundtable Weekly 

 

✓  Tax Reform: Tax Cuts and Jobs Act of 2017

In short, in areas critical to real estate investment, the new law includes a number of provisions that ensure the tax code continues to tax real estate on a rational basis.

 
  • Preserves the deductibility of business interest. The new law restricts the deductibility of net interest to the extent it exceeds 30 percent of earnings before interest, tax, depreciation, and amortization (EBITDA).  However, an electing real property trade or business can continue to deduct net interest
  • Retains real estate like-kind exchanges. 
  • Generally maintains real estate cost recovery rules.  The new law maintains extended cost recovery for real property, while applying slightly longer recovery periods for taxpayers electing to use the real estate exception to the interest limit.
  • Preserves pass-through taxation of partnerships and provides 25% tax cut to pass-through businesses.  Some policymakers had suggested taxing all businesses at the entity level, like a C corporation.  However, the final bill not only maintained the flexibility associated with pass-through tax rules, but also included a 25% tax cut for noncorporate businesses to ensure parity with the tax relief for corporations.
  • Increases the holding period for the preferential capital gains rate on “carried interest.”  The bill require taxpayers to hold certain partnership interests or assets for 3 years, rather than 1 year, to qualify for the reduced capital gains rate.

 

✓  Tax Reform Implementation - Treasury Rulemaking and Real Estate

Tax reform left many major policy decisions in the hands of the Treasury Department.  Real estate owners and investors need guidance from Treasury regarding how the IRS will interpret the new provisions and how they will operate in practice. 

Tax reform included 79 explicit grants of regulatory authority.  Treasury has created a Tax Reform Implementation Office, and in February, the agency updated its priority guidance plan to include 18 new projects related to tax reform.  In late March, appropriations legislation included an additional $320 million to help with the cost of implementing the new law.

Business interest limitation – real estate exception (sec. 163(j)).  Tax reform includes a strict limitation on the deductibility of business interest expense to the extent it exceeds 30% of annual earnings before interest, tax, depreciation, and amortization (EBITDA).  A critical exception is available to an “electing real property trade or business.” 
Real estate investors need greater clarity on the scope of the real estate exception.  For example, what if a borrower is engaged in more than one trade or business?  What if the debt is incurred at the partner level, but the business activity occurs at the partnership level?  How is debt allocated among different activities?  TPAC submitted comments in February that provided extensive recommendations for how regulations should address these situations.  Treasury regulations on business interest deductibility are expected before the end of 2018.

Pass-through deduction (sec. 199A).  Real estate and the new deduction for pass-through business income (sec. 199A).  Tax reform includes a new deduction that can reduce the tax rate on pass-through business income to as low as 29.6%.  Taxpayers must meet several requirements to qualify.  The deduction is only available to the extent the trade or business pays wages or owns depreciable assets, such as real estate.  Certain services-related businesses are ineligible. TPAC submitted comments regarding section 199A in January.  In August, Treasury issued proposed regulations that address important questions related to when real estate investment constitutes a qualifying trade or business, how taxpayers can aggregate interests in different real estate entities, and how investment in depreciable assets is measured.  In general, the regulations are positive and put at ease certain concerns that could have rendered the deduction largely ineffective for real estate investment.  A TPAC working group is in the process of preparing comprehensive comments designed to help policymakers understand the practical implications of their regulatory decisions and offer thoughtful suggestions for the final rulemaking.

In short, timely guidance from Treasury on these issues and others will help avoid potential disruptions in projects and transactions caused by a lack of certainty regarding tax consequences.      

 

✓  Tax Reform Technical Corrections - Nonresidential, Improvements, Multifamily Housing

In the rush to pass tax reform, one unintentional drafting mistake has resulted in a longer cost recovery period for qualified interior improvements (a category that previously covered leasehold improvements, retail improvements, and new restaurant construction). 

Nonresidential interior improvements should be subject to a 15-year recovery period and bonus depreciation (or a 20-year recovery period for a real estate business that elects out of the new business interest limitation).  A drafting mistake in the statute means such costs are subject to a 39-year or 40-year recovery period.  A technical correction is needed, and The Real Estate Roundtable is working with other industry groups to advance a legislative fix. 

In August, all 14 Republicans on the Senate Finance Committee wrote to Treasury urging the Administration to use its authority to provide relief.  Also in August, Senator Pat Toomey (R-PA) filed an amendment to an appropriations bill to delay enforcement of the 39-year rule.  Although it did not get a vote, it has helped raise the profile of the issue, increasing the likelihood that action is taken before the end of the year.

Other technical corrections supported by The Roundtable would ensure that existing residential rental property owned by an electing real property trade or business is subject to a 30-year recovery period.  The law is clear that the 30-year period applies to newly acquired residential rental property, and we believe Congress intended the same 30-year period (rather than 40 years) to apply to existing holdings.   

 

✓  Opportunity Zones - A New Tool to Boost Real Estate Investment, Economic Development in Distressed Communities

The Tax Cuts and Jobs Act includes a new tax incentive aimed at spurring economic development and job creation in low-income communities.  The tax incentives allow qualified Opportunity Funds that make long-term investments in designated zones to reduce the burden of capital gains tax for their investors.  The Roundtable submitted detailed comments to the Treasury Department in June suggesting ways in which the program could attract capital, stimulate job-creating investment, and fulfill its objectives.  Treasury regulations are expected in September.  The rules will answer key questions and determine whether the program is successful in mobilizing new real estate capital to promote economic development in distressed areas.

 

✓  Foreign Investment in Real Property Tax Act (FIRPTA)

FIRPTA applies a discriminatory capital gains tax on foreign investors in U.S. real estate that does not apply to any other asset class.  In so doing, the FIRPTA regime discourages capital formation and investment that could be used to create jobs and improve U.S. real estate and infrastructure. 

• Improvements to FIRPTA foreign pension fund exemption.  In 2015, Congress created an exemption from FIRPTA for foreign pension funds.  In March, Congress passed much-needed improvements to the foreign pension exemption.  Because foreign retirement programs often are structured differently from those in the United States, many foreign pension funds were unclear whether they qualified.  Technical corrections enacted in March clarify that a wide variety of foreign pension funds are eligible for the exemption, including governmental, Social Security-type arrangements.
• IRS Notice 2007-55.  Last October, 32 Members of the House Ways and Means Committee asked the Treasury Department to repeal an IRS Notice that raises the cost of investing in U.S. real estate by subjecting foreign owners of domestically controlled REITs to FIRPTA when the REIT liquidates.  The Roundtable and others are urging Treasury to reconsider the 2007 guidance that reversed taxpayers’ understanding of the law and its operation.  
• Invest in America Act.  Earlier this month, Representative Kenny Marchant (R-TX) and Joseph Crowley (D-NY) introduced legislation to repeal FIRPTA altogether.  The Invest in America Act (H.R. 6726) will undoubtedly increase awareness and jumpstart debate on the harm caused by maintaining an outdated tax regime that discriminates against foreign investment in U.S. real estate and constrains the ability to mobilize private capital for job-creating new investments in U.S. real estate and infrastructure. 

 

✓  Supreme Court Prepares to Rule on Constitutionality of Internet Sales Taxation

In June, in South Dakota v. Wayfair, the Supreme Court overturned its prior case law and upheld a South Dakota law that imposes sales tax collection requirements even if the seller lacks a physical presence in the State.  The decisions marks a monumental step forward in the effort to create a level economic playing field between internet retailers and Main Street stores.   

The Roundtable, along with other real estate organizations, such as the International Council of Shopping Centers, submitted an amicus brief urging the Court to grant certiorari in the Wayfair case.  In March, The Roundtable joined the same groups in filing an amicus brief in support of the South Dakota law.

Prior efforts to create a uniform, national framework for state collection of taxes on internet transactions have consistently hit opposition from key lawmakers, such as House Judiciary Committee Chairman Bob Goodlatte (R-VA). 

In addition to removing a source of tax discrimination against Main Street stores, the Wayfair decision will help ensure States and localities can finance critical public services. 

Going forward, opponents of the decision are expected to seek legislation that would override Wayfair.  In addition, both sides may eventually seek federal legislation in order to avoid overlapping State laws and potential double taxation, and to provide tailored rules for small businesses. 

  ✓  Tax Incentives for Affordable Housing

The low-income housing tax credit (LIHTC) is an effective, market-based tool to help address the shortage of affordable housing in the United States.  The 40 percent reduction in the corporate tax rate indirectly reduced the value of the LIHTC and demand for the credit. 

In March, Congress temporarily increased the cap on LIHTC allocation authority and modified the rules to allow income averaging across units when measuring compliance with the program’s income requirements.  Such steps are welcome and an important step forward.  The Real Estate Roundtable is working with industry leaders and stakeholders to analyze the extent of market disruption caused by tax reform and identify potential solutions. 


✓  Condominium Tax Accounting

Current tax accounting rules unjustly accelerate income tax liability for the developers of new residential condominiums.  The rules require developers to recognize income and pay tax on their expected profit as construction is ongoing, well before pre-sale transactions are closed and full payment is due from the buyer, creating a mismatch of cash flow and tax liability.
Representatives Carlos Curbelo (R-FL) and Joseph Crowley (D-NY) have introduced the Fair Accounting for Condominium Construction Act (H.R. 3659) to correct the tax accounting treatment of new condominium development.  The Real Estate Roundtable supports their efforts and is urging lawmakers to pass the legislation.  

 

 ✓  Tax Regulations

The Real Estates Roundtable has identified several areas where executive action on tax regulations could spur job growth and help modernize U.S. real estate and infrastructure.  The Roundtable is encouraging the Treasury Department to act in the following areas:  In short, in areas critical to real estate investment, the new law includes a number of provisions that ensure the tax code continues to tax real estate on a rational, economic basis

 
  • Repeal of IRS Notice 2007-55, which relates to FIRPTA and liquidating distributions by domestically controlled REITs);
  • Finalization of the section 460 proposed regulations, which relate to condominium construction and the completed contract method of accounting;
  • Repeal of IRS Private Letter Ruling on REIT preferential dividends and dual-class share structures;
  • Modification of final and proposed partnership liability allocation regulations;
  • Fractions rule guidance, which facilitates real estate investment by retirement funds and education endowments; and
  • Formal withdrawal of estate tax regulations under Section 2704, which relate to the valuation of family-owned businesses.  

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For weekly updates on key policy issues affecting commercial real estate, see our eNewsletter  Roundtable Weekly.   

The Roundtable's Tax Policy Advisory Committee (TPAC) is led by Frank G. Creamer, Jr. (FGC Advisors, LLC) as chairman, and Jeffrey S. Clark (Host Hotels & Resorts, Inc.) as vice chairman. TPAC members are leading experts on tax issues affecting commercial and multifamily real estate, and include representatives from the major national real estate trade associations.

For additional information on TPAC issues, please contact Ryan P. McCormick, Vice President and Counsel, The Real Estate Roundtable, at (202) 639-8400. 

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