Tax, Budget and Related Issues

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

Policy Issues SnapShot: June 2017
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 2017 National Policy Agenda, Real Estate: A Foundation for Growth, includes a section on Tax Policy.

Tax Reform

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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 Technical Corrections

Tax Regulations    

✓ Tax Reform  
 Along with regulatory reform and health care legislation, tax reform remains one of the top economic priorities of the Trump Administration.  It is possible, though unlikely, that tax reform could merge with an infrastructure investment package.

The political challenge of passing legislation to repeal and replace the Affordable Care Act (“Obamacare”) has slowed congressional consideration of tax reform.  The timetable for action on tax reform has been delayed until after the August recess as Congressional Republicans work to achieve consensus on the difficult issues presented by health care.

In late April, President Trump’s economic team released the Administration’s tax reform objectives.  The brief, one-page plan calls for a 15% business tax rate, a shift to a territorial tax system, a doubling of the standard deduction, a consolidation of income tax brackets, and the repeal of all itemized deductions (including the state and local tax deduction) other than mortgage interest and charitable giving.    

The Administration’s tax plan was noticeably silent on several major proposals from House Republicans, including:  the repeal of business interest deductibility, immediate expensing of all capital investment (including structures), and border adjustability.  In subsequent interviews, Treasury Secretary Steven Mnuchin has indicated the Administration’s preference to retain the deductibility of interest and its opposition to border adjustability in its current form. 

Congressional Republicans are inclined to use special budget “reconciliation” rules that will allow tax reform to pass without the risk of a
filibuster or the requirement for 60 votes in the Senate. 

Budget reconciliation essentially creates a “fast track” process for bills affecting the federal deficit.  Legislation is sent to the full Senate pursuant to a “reconciliation instruction” that is adopted as part of a concurrent (House-Senate) budget resolution.  Bills considered under reconciliation are subject to strict time limits and do not need 60 votes in order to close the floor debate in the Senate.
 
A Better Way, the House Republican tax reform blueprint released in June 2016, remains a major focus of tax reform discussions in Washington.  Developed by Speaker Paul Ryan (R-WI) and Ways & Means Chairman Kevin Brady (R-TX), the 35-page blueprint proposes fundamentally changing the basis for taxing U.S. businesses from a system that measures and taxes net income to one that measures and taxes cash flow.

Key elements of the House tax reform blueprint include: 
  • Across-the-board reduction in tax rates (corporate, individual, and pass-through businesses);
  • 50% tax exclusion for investment income (capital gains, dividends, and interest);
  • Elimination of the deductibility of business interest;
  • Immediate expensing of capital investment, including structures but not land;
  • Likely repeal of capital gain deferral through like-kind exchanges;
  • International reform that includes a territorial system and border adjustability (exempt exports, no deduction for the cost of imports);
  • Repeal of most individual itemized deductions, including the state and local tax deduction.
While U.S. Senators have expressed interest in tax reform, certain aspects of the House tax plan have generated significant resistance, such as the concept of border adjustability.  
 In the last Congress, Senate Finance Committee Chairman Orrin Hatch (R-UT) worked for several months to develop legislation aimed at integrating the corporate and individual tax systems, but never released an actual proposal. Senate Finance Committee Ranking Democrat Ron Wyden (D-OR) supports comprehensive tax reform, and his prior tax reform proposals would have curtailed the deductibility of business interest.

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The Roundtable's 2017 National Policy Agenda, Real Estate: A Foundation for Growth, includes a section on Tax Policy.


On June 1, 2017, The Real Estate Roundtable and 21 other national real estate organizations submitted testimony to the House and Senate tax-writing committees in conjunction with recent tax reform hearings.  The written statements express support for tax reform while emphasizing the importance of avoiding unintended negative consequences. 
The organizations endorsed four principles to guide a tax overhaul:
1. Tax reform should encourage capital formation and appropriate risk-taking, while also providing stable, predictable, and permanent rules conducive to long-term investment;

2. Tax reform should ensure that tax rules closely reflect the economics of the underlying transaction — avoiding either excessive marketplace incentives or disincentives that can distort the flow of capital investment;

3. Tax reform should recognize that, in limited and narrow situations (e.g., low-income housing and investment in economically challenged areas), tax incentives are needed to address market failures and encourage capital to flow toward socially desirable projects; and

4. Tax reform should provide a well-designed transition regime that minimizes dislocation in real estate markets.
 
In the Senate, the current Chairman of the Senate Finance Committee, Orrin Hatch (R-UT), has focused much of his attention on corporate tax reform, and more specifically, ending the double taxation of corporate income by integrating the individual and corporate income taxes.

Although most real estate investment in the United States is conducted through pass-through entities or real estate investment trusts (REITs), corporate tax integration could have major implications for the real estate industry.  For example, Senator Hatch’s proposal, which has not yet been publicly released, is widely anticipated to include a deduction for dividends paid to shareholders, as well as an entity-level withholding tax on interest payments.  If interest income is not subject to tax because the lender is foreign or otherwise tax-exempt, the payor of interest (debtor) would owe a withholding tax on interest paid to the creditor.  .

* Senate Finance Committee Ranking Member Ron Wyden (D-OR) in recent months released a number of tax reform-oriented proposals focused on specific issue areas, including:  depreciation and cost recovery, financial products, infrastructure financing, and retirement savings.

✓ Tax Technical Corrections

he Foreign Investment in Real Property Tax Act (FIRPTA) deprives the United States of job-creating real estate investment by imposing a much higher tax burden (as high as 54.5%) on inbound real estate investment, relative to other types of U.S. assets, such as stocks and bonds.  In December 2015, Congress provided relief from FIRPTA for certain investors, such as foreign pension funds. 

In December 2016, Congressional tax-writers introduced the Tax Technical Corrections Act of 2016, which would strengthen the 2015 reforms and reflects comments provided by The Real Estate Roundtable.  The legislation should provide greater comfort to foreign pension funds seeking to qualify for the new FIRPTA exemption, particularly:  multiemployer plans, pension plans benefiting self-employed persons, and Social Security-type arrangements if the retirement benefits are based on prior work history.

The Bipartisan Budget Act, enacted in October 2015, included an overhaul of the rules for auditing and collecting tax adjustments from partnerships.  The Real Estate Roundtable worked closely with the bill drafters to ensure that the legislation addressed the government’s legitimate administrative concerns, while avoiding changes that were unnecessary, and that would harm real estate owners and the broader economy by undermining the fundamental principles of pass-through taxation.

The Tax Technical Corrections Act of 2016 includes a critical provision clarifying that the new partnership audit rules will not adversely affect tiered partnerships, a common tax structure used in real estate. 

While not yet enacted, the technical corrections bills are bipartisan and noncontroversial, and we anticipate they will be reintroduced and could pass without opposition in 2017. 

✓  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: 

  • 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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