Infrastructure and Tax Policy

Democrats’ Revised Tax Plan Includes Changes and Improvements Important to Real Estate and Other Pass-through Businesses

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This week’s frenzy of infrastructure negotiations in Washington was capped off by the White House’s release yesterday of a pared down, $1.75 trillion framework agreement on “human” infrastructure legislation, which trimmed back potential tax increases on commercial real estate and other pass-through businesses. (CQ, Oct. 30 and Tax Notes, Oct. 29) 

Dynamic Negotiations 

  • By introducing revised legislation – the Build Back Better Act (H.R. 5376) – Democratic leaders hoped to create momentum for a vote on the separate, bipartisan “physical” infrastructure bill. Their effort was unable to secure the necessary support for an immediate vote from House progressives. (Section-by-section bill summary and Washington Post, Oct. 29)

  • Policymakers did pass a short-term extension of surface transportation programs until Dec. 3 – the same day that funding for the government will run out and within the time frame for addressing the current debt ceiling. (Punchbowl News, and BGov, Oct. 30)

  • Roundtable President and CEO Jeffrey DeBoer commented on the evolving infrastructure legislative developments in an interview this week with American City Business Journals. DeBoer noted that as the bill’s cost has come down, policymakers have eliminated many proposed tax increases.

  • “We very much want to see the physical bipartisan infrastructure bill pass. It has been tied in the House to the larger human infrastructure bill, and that legislation is slowly winding its way to the finish line. As the larger bill was put forward, we were concerned about some provisions that we felt might target real estate activities and real estate investment. We tracked all of these various proposals such as mark-to-market and wealth taxes. We're continuing to monitor developments and ensure that nothing comes up without proper vetting or full understanding of how it would impact CRE,” DeBoer said. 

What It Means for CRE 

Marcus and Millichap Oct 21 2021 tax webinar

  • The revised reconciliation bill reflects continued progress on a number of tax issues important to real estate and prioritized by The Real Estate Roundtable. Critically, the current bill includes:     
     
    • No limitations on like-kind exchanges (sec. 1031),
    • No increase in the capital gains tax rate,
    • No restrictions on the 20% pass-through business income deduction (sec. 199A),
    • No taxation of unrealized gains at death or repeal of the step-up in basis of assets,
    • No changes in the tax treatment of carried interest, and
    • No restrictions on estate tax valuation discounts. 
  • Additionally, the revised legislation excludes a complex mark-to-market regime to tax the unrealized gains of billionaires, new tax burdens on grantor trusts, and a provision that would have prohibited IRA investment in many non-listed REITS. 

Key Tax Revenue Provisions 

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  • In addition to provisions aimed at corporate and international business activities, tax provisions in the framework agreement include:
     
    • Expansion of the 3.8% net investment income tax to cover a much broader range of income – such as capital gains and rents – earned by both active business owners (such as real estate professionals), S corp. shareholders, and limited partners.

    • A new proposal to impose a 5% surtax on a taxpayer’s modified adjusted gross income (AGI) over $10M and an additional 3% surtax tax on modified AGI over $25 million.

    • Restrictions on taxpayers’ ability to deduct more than $250K (individual) or $500K (married couple) of losses incurred in an active trade or business from their portfolio income or wages.

    • Modifications to the portfolio interest exception that exempts interest earned on certain U.S. debt obligations from a withholding tax on outbound interest payments. The exception is sometimes used by foreign institutions when investing in US real estate.

    • Clarification that limitation on interest deductibility (sec. 163(j)) applies at the partner or shareholder level, not the entity level.

    • Clean Energy tax provisions affecting real estate are covered in the Roundtable Weekly story below. 

Dropped Tax Incentives 

  • As the cost of the bill came down, certain tax incentives were eliminated from the package: expansion of the low-income housing tax credit and the credit for rehabilitating historic structures, creation of a new tax credit for home construction in low-income communities for low-income buyers, and new infrastructure tax credit bonds and related infrastructure financing provisions. 

Legislative changes to the bill could occur next week on crucial issues such as the SALT deduction, but the timing of action on a final agreement remains uncertain. (Bloomberg, Oct. 29) 

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Infrastructure and Clean Energy

Biden Administration Proposal Includes $555 Billion Mix of Senate and House Clean Energy Proposals

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The White House’s scaled back $1.75 trillion “framework” infrastructure reconciliation bill includes a $555 billion mix of Senate and House clean energy provisions. (Axios, Oct. 29) 

Why It Matters 

  • Revamped clean energy tax incentives “form the biggest measures to fight climate change in the budget reconciliation bill.” (PoliticoPro and B-Gov, Oct. 28)
  • House Ways and Means Chair Richard Neal (D-MA) and Senate Finance Chairman Ron Wyden (R-OR) said yesterday they had reached agreement on the climate provisions. (PoliticoPro, Oct. 28)
  • The incentives largely reflect the suite of credits and deductions passed Ways and Means last month with Democratic-only support (Roundtable Weekly, Sept. 17). Senate Finance provisions favorable to CRE advanced in May (Roundtable Weekly, May 28) have also been included in the latest House package. 

Clean Energy Tax Provisions 

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  • Based on the text and a section-by-section summary of the Build Back Better reconciliation bill, clean energy tax provisions of interest to the U.S. real estate sector include:

    • Extension of the Section 48 Investment Tax Credit to offset some of the expenses of solar properties, combined heat and power systems, and fuel cells – with expansions to cover energy storage, dynamic glass, and “linear” generators;   

    • A revised tax credit for installations of EV charging stations;

    • An elective “direct pay” option allowing entities with little or no tax liability to obtain a payment equal to the value of the credits they would have received if they paid taxes; and

    • Reform of the 179D tax deduction geared toward incentivizing energy efficiency “retrofits” of existing commercial and multifamily buildings.
  • The green energy incentives, however, are subject to new labor rules that will affect taxpayers’ decisions to utilize the benefits. The Build Back Better Act does not require businesses seeking these credits or deductions to pay Davis-Bacon wages or hire registered apprentices on clean energy projects. However, the amount of the incentives can be five times greater for qualifying projects meeting these labor costs compared to those that do not.
  • The Roundtable’s latest Policy Issues Toolkit (“Clean Energy Tax Incentives” fact sheet, p. 25) provides more details on particular incentives and the wage/apprenticeship issues at play in reconciliation talks.
  • A separate climate priority of Progressive Democrats known as the Clean Electricity Performance Program (CEPP) – that would have offered incentives to power companies switching to renewable energy and fining those that “moved slowly from fossil fuels” – was dropped from the reconciliation bill at the urging of Senator Joe Manchin (D-WV). (Roll Call, Oct. 28.) 

CRE’s Role 

John Fish 2021 Suffolk

  • Roundtable Chair John Fish (Chairman and CEO, Suffolk), above, commented on the importance of clean energy measures affecting commercial real estate in an interview published this week with American City Business Journals.

  • Fish emphasized the impact that the built environment has on clean energy. He noted buildings produce 40 percent of all carbon emissions and 36 percent of all energy use. He also commented on the role of older building stock, since 75 percent of all buildings in America average 35 years old or older.

“The building world – the asset class of the buildings themselves – contributes a great deal of influence to the health of our environment. We all support energy efficiency, we all support lowering the carbon footprint. We really feel that the real estate industry, of all industries, has probably one of the biggest impacts on that conversation than anybody else. We welcome the opportunity to be at the table and to have those constructive dialogues,” Fish said. (Business Journals, Oct. 27)

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