Tax, Budget and Related Issues

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

2019 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 2019 National Policy Agenda, also includes a section on Tax Policy.

See more details below on each policy issue:

Real Estate and the Congressional Tax Agenda - Tax Cuts and Jobs Act

Overview - Tax Cuts and Jobs Act of 2017

Infrastructure

Qualified Improvement Property

Foreign Investment in Real Property Tax Act (FIRPTA)

• Affordable Housing   

Carried Interest

Tax Condominium Tax Accounting

Real Estate and Treasury Regulatory Developments

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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.

• Opportunity Zones 

Preserving the Supreme Court's Decision Creating Tax Fairness for Main Street Retailers

 

 
✓ Recent Developments:

⇒ 04/19/2019      Opportunity Zones;Tax Policy
TAX POLICY - April 19, 2019 - Roundtable Weekly 
Treasury Issues Highly Anticipated and Favorable Opportunity Zones Guidance; President Trump Hosts Opportunity Zones Event 

⇒ 04/12/2019      FIRPTA - Foreign Investment in Real Property Tax Act of 1980;Tax Policy
TAX POLICY – FIRPTA - April 12, 2019 - Roundtable Weekly 
Bipartisan FIRPTA Repeal Legislation Introduced 

⇒ 04/12/2019      Tax Policy
TAX POLICY – Section 199A - April 12, 2019 - Roundtable Weekly 
Business Coalition Supports Legislation to Make New Pass-Through Deduction Permanent 

⇒ 03/29/2019      Capital and Credit
CAPITAL & CREDIT – CANNABIS – March 29, 2019 - Roundtable Weekly 
House Committee Approves Bill Allowing Banks to Serve Legal Cannabis Businesses; Roundtable Urges Enactment 

⇒ 03/29/2019      Carried Interest;Tax Policy
TAX POLICY - March 29, 2019 - Roundtable Weekly 
House Ways & Means Committee Signals Upcoming Tax Legislation; Roundtable Weighs in Regarding Carried Interest, FIRPTA Repeal 

⇒ 03/22/2019      Carried Interest;Tax Policy
TAX POLICY - March 22, 2019 - Roundtable Weekly 
Democrats Reintroduce Legislation to Tax Carried Interest At Ordinary Income Rate 

⇒ 03/15/2019      Tax Policy
TAX POLICY - March 15, 2019 - Roundtable Weekly 
Senators Introduce Bipartisan Legislation to Correct Cost Recovery Period for Nonresidential Real Estate Improvements 

⇒ 03/08/2019      Infrastructure
INFRASTRUCTURE - March 8, 2019 - Roundtable Weekly 
House Ways and Means Committee Explores Funding for National Infrastructure Improvements 

⇒ 03/01/2019      Tax Policy
TAX POLICY - March 1, 2019 - Roundtable Weekly 
Roundtable Asks Treasury to Clarify Real Estate Exception to New Limit on Business Interest Deductibility 

⇒ 02/22/2019      Opportunity Zones
OPPORTUNITY ZONES - Feb. 22, 2019 - Roundtable Weekly 
Vice President Pence Promotes Opportunity Zones Program; Wall Street Investors Focus on Opportunity Funds 

⇒ 02/15/2019      Tax Policy
TAX POLICY - Feb. 15, 2019 - Roundtable Weekly 
IRS Holds Hearing on Opportunity Zones; Roundtable Working Group Meets With Treasury Officials on OZ Regulations 

⇒ 02/08/2019      Energy;Infrastructure
POLICY LANDSCAPE - Feb. 8, 2019 - Roundtable Weekly 
Border Security Negotiators Optimistic; Democratic “Green New Deal” Resolution Includes Energy Efficiency Goals for Buildings 

⇒ 02/01/2019      Congress;Infrastructure;Tax Policy
POLICY LANDSCAPE - Feb. 1, 2019 - Roundtable Weekly 
Lawmakers Focus on Preventing Second Partial Government Shutdown; House Committees Prep for Action on Tax and Infrastructure Issues 

⇒ 01/25/2019      Tax Policy
TAX POLICY - January 25, 2019 - Roundtable Weekly 
Treasury Releases Highly Anticipated Final Regulations on New Pass-Through Deduction 

 

✓  Real Estate and the Congressional Tax Agenda - Tax Cuts and Jobs Act
House Democrats are launching a full-scale review of TCJA and its impact on families and workers.  Specifically, Members of Congress are focusing on the economic benefits of the corporate rate reduction, the distribution of the bill’s benefits among different income groups, and the consequences of capping the deductibility of state and local taxes.  Members are also drawing attention to the TCJA’s impact on the budget deficit. 

The tax treatment of real estate could get scrutinized as the House Ways and Means Committee reviews TCJA.  A staff report last July by the Democrats on the House Oversight Committee incorrectly suggested that TCJA penalized homeowners while providing $66 billion in “lucrative new tax breaks for real estate developers.”  The report was actually referring to TCJA’s retention of tax rules that have been in place since the 1920s—the deductibility of business interest and the deferral of gain in like-kind exchanges.  The report also criticized the new pass-through deduction, which extends to all noncorporate businesses, not just real estate. 

If the House moves forward with a budget resolution, lawmakers could vote as early as April on proposals to repeal or unwind elements of TCJA.  The budget resolution is nonbinding, however, and only a statement of fiscal priorities to help guide the committees of jurisdiction.    

 

✓  Overview - Tax Cuts and Jobs Act of 2017

The Tax Cuts and Jobs Act (TCJA) enacted in December 2017 represents the most sweeping changes to the tax system since 1986.  The landmark tax bill was supported by The Real Estate Roundtable.  It reduced barriers to private sector capital formation and preserved the rational tax treatment of real estate.  Among other changes, the bill lowered the corporate tax rate from 35 to 21 percent, lowered individual rates, and created a new deduction for pass-through business income that can effectively reduce the tax rate on pass-through businesses to 29.6 percent.  The bill provided generous new rules for the immediate expensing of certain capital investment while limiting the deductibility of business interest expense (with an exception for real estate debt).

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.

 

✓  Infrastructure

In a polarized Congress, large-scale investment in the nation’s infrastructure is one area where hope of bipartisan agreement remains.  President Trump and congressional Democrats support increased investment in the country’s aging roads, bridges, and other infrastructure systems.  Ways and Means Chairman Neal has indicated he intends for his committee to consider an infrastructure bill this spring. 

Agreeing on the scope (and cost) of an infrastructure bill is a principal challenge.  It could extend beyond roads, bridges, and transit to include water, broadband, affordable housing, and other issues.  Tax changes could have a major role in paying for an infrastructure initiative.  Alternatively, as with TCJA, Congress and the President could agree not to pay for the legislation altogether.  There is no sign yet of an emerging agreement on whether and how to pay for infrastructure legislation, or even consensus among the main proponents of infrastructure investment—Congressional Democrats. 

An infrastructure bill almost certainly will include tax incentives and other changes designed to stimulate greater private investment in infrastructure projects.  In conjunction with a House Ways and Means hearing on infrastructure in March, The Roundtable urged the committee to unlock private capital for infrastructure investment by repealing the Foreign Investment in Real Property Tax Act (FIRPTA) (discussed further below).  The Roundtable also endorsed a responsible increase in the per gallon federal gas “user fee” and reform of the tax rules for private activity bonds (PABs).  

 

✓  Qualified Improvement Property

A drafting mistake in TCJA has resulted in a longer cost recovery period for qualified nonresidential interior improvements (a new and expanded 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).  The drafting error means such costs are subject to a 39-year or 40-year recovery period.  The mistake raises the after-tax cost of improving nonresidential real estate. 

A technical correction is needed, and The Real Estate Roundtable is working with other industry groups to advance a legislative fix.  On March 14, Senators Pat Toomey (R-PA) and Doug Jones (D-AL) introduced the Restoring Investments in Improvements Act (S. 803) to correct retroactively the drafting error.  

 

✓  Residential rental property cost recovery period

Another correction supported by The Roundtable would ensure that existing residential rental property owned by an electing real property trade or business (RPTOB) is subject to a 30-year recovery period.  An electing RPTOB is a real estate business that has elected out of the new limitations on the deductibility of business interest.  The law is clear that the 30-year period applies to the newly acquired residential rental property of an electing RPTOB, and we believe Congress intended the same 30-year period (rather than 40 years) to apply to existing assets owned by the business.

 

✓  Foreign Investment in Real Property Tax Act (FIRPTA)

FIRPTA imposes 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 create jobs and improve U.S. real estate and infrastructure.  Congress passed meaningful reforms to FIRPTA in 2015, exempting foreign pension funds and doubling the amount a foreign interest may invest in a REIT.

Late in 2018, Representatives Kenny Marchant (R-TX) and Joseph Crowley (D-NY) introduced a bill to repeal FIRPTA altogether, the Invest in America Act (H.R. 6726).  The Roundtable anticipates the legislation will be reintroduced in early April 2019 by Representatives John Larson (D-CT) and Marchant.  The Roundtable and other stakeholders are encouraging Members of Congress to include FIRPTA repeal in infrastructure legislation.  Infrastructure assets are considered real property for FIRPTA purposes.

 

  ✓  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 2018, 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.   

 

  ✓  Carried Interest

In March, Rep. Bill Pascrell (D-NJ) introduced the Carried Interest Fairness Act (H.R. 1735).  The bill is the successor to prior bills proposing to re-characterize carried interest as ordinary income.  At the time of introduction, it was cosponsored by 19 House Democrats.  The Roundtable opposes the legislation on the grounds that it would discourage entrepreneurship, encourage debt rather than equity financing, tax sweat equity invested in businesses, and slow economic growth

 

✓  Condominium Tax Accounting

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.

In the last Congress, the Fair Accounting for Condominium Construction Act (H.R. 3659) would have corrected the tax accounting treatment of new condominium development.  The Real Estate Roundtable will work with Members of Congress to advance this issue in 2019

 

✓  Real Estate and Treasury Regulatory Developments

TCJA Implementation.  The tax code under  TCJA continues to tax the real estate industry in line with the economics of real estate assets, avoiding excessive incentives or disincentives that could distort markets and ultimately harm the economy.  At the same time, Congress delegated important administrative rulemaking to Treasury officials, and the implementation process is ongoing. 
The Real Estate Roundtable’s Tax Policy Advisory Committee has played an active role in the rulemaking process, providing technical comments designed to help Treasury draft tax reform regulations.  Final regulations for the new deduction for qualified pass-through business income (section 199A) were issued in January.  The regulations are largely favorable to real estate. 

Critical areas of Treasury rulemaking that remain open include the following:  

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 and how it applies in the context of tiered structures.  Treasury issued proposed regulations on business interest deductibility in December 2018 and The Roundtable followed with formal comments in February.  Final regulations are expected in 2019.

Opportunity Zones -  TCJA included 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 Treasury Department estimates that Opportunity Zones could boost investment in these targeted areas by $100 billion. 

Opportunity Zones offer enormous potential for transformational, productive real estate investment in low-income communities.  The Roundtable submitted detailed comments to the Treasury Department in June suggesting ways in which the program could attract real estate capital, stimulate job-creating investment, and fulfill its objectives.  Treasury released proposed regulations in October.  The Roundtable provided additional comments in December.  More guidance is expected in the weeks and months ahead.

Final Treasury guidance on these issues and other issues will help avoid potential disruptions in projects and transactions caused by a lack of certainty regarding tax consequences.

 

✓  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 Treasury Department estimates that Opportunity Zones could boost investment in these targeted areas by $100 billion. 

Opportunity Zones offer enormous potential for transformational, productive real estate investment in low-income communities.  The Roundtable submitted detailed comments to the Treasury Department in June suggesting ways in which the program could attract real estate capital, stimulate job-creating investment, and fulfill its objectives.  Treasury released proposed regulations in October.  The Roundtable provided additional comments in December.  More guidance is expected in 2019.

 More resources ...

 

✓  Preserving the Supreme Court's Decision Creating Tax Fairness for Main Street Retailers

In June 2018, 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 decision allows States to collect sales taxes from Internet retailers, just as they do from physical stores—a principle The Roundtable previously pursued through Marketplace Fairness legislation  The Roundtable, along with other real estate organizations, such as the International Council of Shopping Centers, submitted multiple amici briefs in support of the South Dakota law.  The decisions marks a monumental step forward in the effort to create a level economic playing field between internet retailers and Main Street stores.   

Opponents of the decision have introduced legislation to delay, limit, and override Wayfair.  The Roundtable has opposed these bills and is working with stakeholders to ensure a successful and fair implementation of Wayfair by States.

 

 

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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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