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:

New Leadership and a New Direction in Tax Policy

Tax Cuts and Jobs Act

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 Rules on Constitutionality of Internet Sales Tax   

• Tax Incentives for Affordable Housing   

• Condominium Tax Accounting  

• Tax Regulations  

 
✓ Recent Developments:

⇒ 02/01/2019      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 

⇒ 01/18/2019      Congress
116th CONGRESSIONAL COMMITTEES - January 18, 2019 - Roundtable Weekly 
House Congressional Committees Move Forward on Policy Agendas, Add New Members 

⇒ 01/18/2019      Tax Policy
TAX POLICY - January 18, 2019 - Roundtable Weekly 
Industry, Investors Await Opportunity Zones’ Clarifying Guidance Amid Shutdown Delay 

⇒ 01/11/2019      Congress
116th CONGRESS – COMMITTEE LEADERSHIP - January 11, 2019 - Roundtable Weekly 
Congress Ushers In New Leadership on Key Committees 

⇒ 01/11/2019      Congress
POLICY LANDSCAPE - January 11, 2019 - Roundtable Weekly 
Partial Government Shutdown Continues Over Border Wall Disagreement -- Roundtable Weekly 

⇒ 01/04/2019      Tax Policy
TAX POLICY - January 4, 2019 - Roundtable Weekly 
Tax Technical Corrections Draft Bill Released by Outgoing House Ways and Means Chair; New Chair Plans Hearings on Tax Overhaul’s Impact 

⇒ 12/21/2018      Tax Policy
OPPORTUNITY ZONES - December 21, 2018 - Roundtable Weekly 
Roundtable Comment Letter Recommends Additional Guidance from Treasury and IRS to Accelerate Capital Investment in Opportunity Zone

 
 

✓  Changing Leadership and a New Direction in Tax Policy
Senator Charles Grassley (R-IA) is the incoming Chairman of the Senate Finance Committee, a position he held twice previously.  Representative Richie Neal (D-MA), the long-time co-chair of the House Real Estate Caucus, is the new Chairman of the House Ways and Means Committee.  He will preside over a committee that includes 10 new Democratic members.

Rather than an end in itself, any significant tax legislation enacted into law in the new Congress likely will be in service to other policy initiatives:

  • Infrastructure.  President Trump and congressional Democrats support increased investment in the country’s crumbling infrastructure.  Tax changes could have a major role in paying for an infrastructure initiative.  In addition, an infrastructure bill almost certainly will include tax incentives and other changes (e.g., FIRPTA repeal) designed to stimulate greater private investment in infrastructure projects.
  • Minimum wage.  House Democrats may seek to increase the federal minimum wage early in 2019.  Historically, tax relief targeted at small businesses and other employers has accompanied minimum wage increases. The tax relief seeks to offset some of the additional cost borne by employers and can help secure the necessary votes.
  • Retirement security.  Key members from both parties support legislation to enhance Americans’ retirement security by promoting retirement savings.  Tax changes will be at the center of any legislation aimed at spurring workers to save more and prepare for their retirement.
  • Climate/energy.  While it is doubtful that Senate Republicans and House Democrats will agree on major legislation reforming U.S. energy policy to address global warming, a modest energy bill could include bipartisan measures related to public lands and natural resources, and could be combined with renewable energy and energy efficiency tax incentives. 

Other tax legislation with bipartisan support that Congress could consider and advance in 2019 include technical corrections to the Tax Cuts and Jobs Act and an extension of expired tax provisions.

 

✓  Revisiting the 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.

 

✓  Tax Reform Implementation - Treasury Rulemaking and Real Estate

The tax code under TCJA continues to tax the real estate industry in line with the underlying 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. 

Tax reform included 79 explicit grants of regulatory authority.  Treasury created a Tax Reform Implementation Office and added 18 tax reform projects to its priority guidance plan.  In March 2018, Congress gave the IRS and Treasury an additional $320 million to help with the cost of implementing the new law.

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 that promote healthy real estate markets, encourage investment and avoid unintended consequences.  Critical areas of Treasury rulemaking 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.  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 issued proposed regulations on business interest deductibility in December 2018 and asked for additional comments. Final regulations are expected in 2019.

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 2018.  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.  One of the remaining issues relates to the ability of real estate investors to aggregate their income and deductions from various real estate partnerships for purposes of the deduction.  TPAC submitted a second set of comments on October 2018.  Final regulations are expected in early 2019.

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.   
 

 

✓  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. 

On January 2, 2019, outgoing House Ways and Means Committee Chairman Kevin Brady (R-TX) released a draft technical corrections bill that included a fix to the drafting error. 

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 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 ...

 

✓  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. 

• Foreign pension fund exemption.  In 2015, Congress created an exemption from FIRPTA for foreign pension funds.  In March 2018, 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.  In October 2017, 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.  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 is working with congressional supporters on reintroduction of the bill in early 2019, with the hope that it could be included in an infrastructure investment package.  FIRPTA discourages inbound private investment in U.S. infrastructure because infrastructure assets are considered real property for FIRPTA purposes.

 

✓  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.

 

  ✓  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 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. 


✓  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.

In the last Congress, Members of the Ways and Means Committee introduced a bipartisan bill, the Fair Accounting for Condominium Construction Act (H.R. 3659), to correct the tax accounting treatment of new condominium development.  The Real Estate Roundtable will work with Members of Congress to advance this issue in 2019.     

 

 ✓  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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