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

Supreme Court Prepares to Rule on Constitutionality of Internet Sales Tax   

Foreign Investment in Real Property Tax Act (FIRPTA)

• Opportunity Zones

• Tax Regulations  

 
✓ Recent Developments:
 
⇒ 05/18/2018      Tax Policy
TAX POLICY - May 18, 2018 - Roundtable Weekly 
Ways & Means Launches Hearings on Impact of Tax Reforms; Top Treasury Official Outlines Timeline for Implementation Guidance   

⇒ 05/11/2018      Tax Policy
TAX POLICY - May 11, 2018 - Roundtable Weekly 
Impact of Tax Reform on Economic Investment, Commercial Real Estate 

⇒ 05/04/2018      Tax Policy
TAX POLICY - May 4, 2018 - Roundtable Weekly 
Top Democrat on House Ways & Means Committee Requests Treasury Guidance on New Pass-Through Deduction 

⇒ 04/20/2018      Internet Sales Tax
INTERNET SALES TAX - April 20, 2018 - Roundtable Weekly 
Supreme Court Appears Divided During Oral Arguments on Expanding States’ Authority to Collect Taxes on E-Commerce Purchases; Decision Expected by June  The U.S. Supreme Court on Tuesday heard oral arguments  on a long-awaited case ( South Dakota v. Wayfair, Inc., No. 17-494  ) that addresses the constitutionality 

 ⇒ 04/20/2018      Congress;Tax Policy
TAX POLICY - April 20, 2018 - Roundtable Weekly 
GOP Leaders Considering Legislation to Make Recent Tax Cuts Permanent; House Speaker Paul Ryan Announces Retirement, Endorses Majority Leader Kevin McCarthy 

 ⇒ 04/13/2018      Commercial Real Estate Markets;Economy
ECONOMIC GROWTH and CRE - April 13, 2018 - Roundtable Weekly 
New Reports Measure Impact of Tax Reform on Real Estate Investment and CRE's Impact on National, State Economies - April 13, 2018 - Roundtable Weekly 

⇒ 04/06/2018      Tax Policy
TAX POLICY - April 6, 2018 - Roundtable Weekly 
Treasury Releases Guidance on New Business Interest Deduction Limit, but Questions for Real Estate Investment Remain 

 

✓  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 current deductibility of business interest expense that exceeds 30% of annual EBITDA.  An exception is available to an “electing real property trade or business.”  Real estate investors need greater clarity on the scope of this critical 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? 

Pass-through deduction (sec. 199A).  Similarly, Treasury needs to issue guidance on the rules and operation of the new 20 percent deduction for qualified pass-through business income.  How will a taxpayer’s income and deductions be grouped and calculated when he or she participates in multiple partnerships, or different trades or businesses?  What does it mean that a business does not qualify if the principal asset of the business is the skill or reputation of one or more of its owners or employees?  How does a like-kind exchange affect the deduction calculation, which takes into account the original basis of the business’s depreciable assets?   

We anticipate formal guidance from Treasury in late summer or early fall.  The Roundtable is urging the Administration to issue timely guidance to avoid potential disruptions in projects and transactions caused by a lack of certainty regarding tax consequences.    

 

✓  Tax Reform Technical Corrections

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). 

Such costs should be subject to a 15-year recovery period and bonus depreciation (or a 20-year recovery period for an electing real property trade or business).  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.

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.    

 

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

In January, the Supreme Court agreed to hear South Dakota v. Wayfair, a direct challenge to its prior rulings that prohibit states from taxing internet retailers and other out-of-state sellers that lack a physical presence in the taxing state. 

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).  The Roundtable supports efforts to level the playing field for all retailers and ensure states and localities can finance critical public services. 

The Roundtable, along with other real estate organizations, such as the International Council of Shopping Centers, previously 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 on the merits. 

The Court held oral arguments on April 17, and a decision is expected by the end of June.  Regardless of the outcome, federal legislation likely will be necessary to avoid overlapping laws and potential double taxation, and to provide tailored rules for small businesses.

 

✓  Foreign Investment in Real Property Tax Act (FIRPTA)

The March appropriations legislation included long-awaited improvements to the FIRPTA exemption for qualified foreign pension funds.  FIRPTA applies a discriminatory tax on foreign investors in U.S. real estate that does not apply to any other asset class.  In 2015, Congress created an exemption from FIRPTA for foreign pension funds.  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.

In 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. 

 

✓  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 forthcoming Treasury guidance will answer key questions and determine whether the program is successful in mobilizing real estate capital to promote economic development in distressed areas. The Roundtable is developing formal comments for the Administration.

 

 ✓  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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