Category: Tax Policy

Real Estate Roundtable Testifies Before Senate on Business Tax Reform

Posted on by Trey Jackson

Rational Taxation of Real Estate Urged to Spur Job Creation, Encourage Business Expansion and Contribute to GDP Growth

WASHINGTON, DC — Real Estate Roundtable President and Chief Executive Officer Jeffrey DeBoer today testified before the U.S. Senate Finance Committee, encouraging modest changes to the current taxation of commercial real estate that would continue to encourage economic growth while cautioning policymakers on specific business tax reform concepts that could cause severe market dislocation.

During today’s Senate hearing on Business Tax Reform, DeBoer testified, “Importantly, commercial real estate markets are largely in balance with supply, only modestly exceeding demand.  Despite our industry’s relative positive health, we know the underlying economy can and should grow more rapidly.”  DeBoer added that The Roundtable is concerned that some concepts under discussion in tax reform are risky, untested and have the potential to cause severe dislocation – not only in real estate markets but in the nations’ capital markets as well.

In his written testimony and his oral statement, The Real Estate Roundtable’s President and CEO addressed specific elements of potential tax reform.  (See Senate Finance Committee webcast and documents at https://www.finance.senate.gov/hearings/business-tax-reform.) Below is a summary of policy issues covered in his testimony:

  • Business interest deduction.  DeBoer noted that interest, the cost of borrowing, is an ordinary and necessary business expense that has always been deductible.  Today, U.S. capital markets are the deepest in the world, but restrictions would deter business formation and expansion.  The impact would fall disproportionately on entrepreneurs and other developers likely to serve small and medium-sized markets.  As interest rates rise, the harm to the economy will grow.
  • Cost recovery / expensing.  Current cost recovery rules need reform, but 100 percent expensing of real estate is a risky and untested proposal.  Accelerated depreciation of real estate in the early 1980s led to tax-driven, uneconomic investment.  Tax rules should reflect the economic life of structures.  Leading research by MIT suggests existing depreciation schedules for real estate are too long.  Shortening depreciation to 20 years would spur sustainable and economically sound investment.   

     

  • Pass-through reform.  U.S. pass-through tax rules create a dynamic, flexible business environment that supports entrepreneurship and productive investment.  Tax reform should provide equitable relief for pass-throughs.  A new, reduced tax rate for pass-through business income should avoid “cliffs”, phase-outs, and carve-outs that discriminate against certain taxpayers and create new economic distortions.    

     

  • Capital gains.  The tax code should encourage entrepreneurial activity and risk-taking through low capital gains rates and continue to recognize that risk can involve more than the contribution of capital.  Reform should also preserve like-kind exchanges, which get properties into the hands of new owners with the time and resources to invest in job-creating property improvements.

     

  • State and local tax deduction.  Tax reform should retain the deductibility of state and local taxes.  Eliminating the state and local tax deduction would undercut the principal source of financing for schools, roads, law enforcement, and other needed infrastructure and public services.

     

  • FIRPTA.  Tax reform should boost job growth and domestic investment by repealing outdated tax barriers to foreign investment in U.S. real estate and infrastructure.

     

  • Infrastructure.  An infrastructure initiative in tax reform is needed to create jobs, reflect the changing transportation needs of Americans and increase productivity, all to benefit the GDP.  

In his testimony, DeBoer said that although tax reform should unleash entrepreneurship, capital formation, and job creation – Congress should also undertake reform with caution, given the potential for economic dislocation and unintended consequences. 

As an example of over-reactive government policies, DeBoer noted past tax reform efforts in 1981 and 1986, which combined, created severe dislocation in real estate markets nationwide; led to job losses and bankruptcies; and contributed to the demise of the savings and loan industry.

The Roundtable’s President and CEO also addressed the federal deduction for state and local property and income taxes. “Ending the federal deduction for state and local property and income taxes could potentially cause significant issues in our nation’s cities, as some businesses relocate for no reason other than taxes. We urge that this idea be rejected,” DeBoer said.

He also testified about the crucial need to preserve interest deductibility.  “Eliminating or limiting the deduction for interest on business debt would cause great dislocation in capital markets, slow economic activity and lessen the unique importance of America’s capital markets,” DeBoer said.

After noting that commercial real estate markets today are estimated to account for nearly 20 percent of America’s GDP and employ millions of Americans, he added that real estate provides local governments with its largest revenue source and plays a key role in the retirement savings and wealth creation of Americans.  “Properly designed tax reform can spur job creation, encourage more robust business expansion and result in a sustainable increase in GDP,” DeBoer testified.  

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Roundtable Welcomes New Study Quantifying Vast Economic Benefits of “Like-Kind” Property Exchanges

Posted on by Trey Jackson

(WASHINGTON) The Real Estate Roundtable welcomes today’s release of an economic study that quantifies the vast economic benefits of “like-kind” property exchanges (authorized under Section 1031 of the U.S. tax code), while illustrating the unintended negative economic impacts of proposals to scale back or repeal this nearly 100-year-old tax provision.

Drs. David Ling (University of Florida) and Milena Petrova (Syracuse University), who co-authored the study —“The Economic Impact of Repealing or Limiting Section 1031 Like-Kind Exchanges in Real Estate” — based their findings on more than 1.6 million real estate transactions spanning 18 years (1997-2014) and totaling $4.8 trillion (unadjusted for inflation).

“The new Ling-Petrova study demonstrates how critical like-kind exchanges are to the health and vibrancy of real estate activity in the United States,” said Roundtable President and CEO Jeffrey DeBoer. As he explained, “Acquiring and improving commercial real estate requires large amounts of capital, and section 1031 helps real estate businesses grow and expand organically — with less debt. In short, like-kind exchanges allow property owners to put more of their earnings back into the private sector — hiring workers, upgrading and improving properties, and generating much-needed economic activity.”

Like-kind exchange rules allow taxpayers to defer tax when they exchange one property held for investment or business use for other property of a “like kind.” They also contribute to a more dynamic real estate sector by eliminating potential “lock-in” effects (particularly in the case of less-productive assets).

Such exchanges, thus, foster increased investment and reinvestment activity; allow real estate owners to better allocate resources; and decrease debt levels in commercial and multifamily real estate transactions. Additionally, “1031 exchanges” help to safeguard property values — which underlie local government budgets across the country — and help to protect tenants by stabilizing rents.

In a letter to congressional tax-writers in March, The Roundtable and coalition partners asserted, “There is strong economic rationale for the like-kind exchange provision’s nearly 100-year existence in the Code. Limitation or repeal of section 1031 would deter and, in many cases, prohibit continued and new real estate and capital investment.”

As the coalition explained, like-kind exchanges:
  • are integral to the efficient operation and ongoing vitality of thousands of American businesses, which in turn strengthen the U.S. economy and create jobs.
  • facilitate taxpayers’ ability to exchange a property for more-productive property; to diversify or consolidate holdings; and to transition to meet changing business needs.
  • are used by companies large and small in a wide range of industries, using different kinds of business structures.

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Roundtable, Coalition Partners Urge FIRPTA Reform as House Tax-Writers Seek Multi-Year Infrastructure Funding Solutions

Posted on by Trey Jackson

(WASHINGTON, D.C.) — In conjunction with a House Ways & Means Committee hearing today exploring long-term funding solutions for the Highway Trust Fund (HTF) — whose latest funding “patch” expires July 31 — The Real Estate Roundtable and a coalition of business and labor organizations urged reform of the Foreign Investment in Real Property Tax Act (FIRPTA) as a “simple, cost-effective” way to “galvanize billions in new private capital for investment in U.S. transportation and infrastructure.”

In a letter submitted for the hearing record, the coalition said the 1980 law “is a major hurdle for the foreign investor seeking to invest in US infrastructure projects.” It also characterized FIRPTA as a “punitive,” “anti-competitive” law that “subjects foreign investment in U.S. real estate or infrastructure to a much higher tax burden than applies to a foreign investor purchasing a U.S. stock or bond, or an investment in any other asset class.”  In some cases, the FIRPTA tax burden is as high as 54.5 percent. [A similar letter is being submitted to Senate tax-writers in conjunction with their scheduled HTF hearing tomorrow.]

In the view of The Roundtable and its coalition partners, any long-term HTF funding bill should include FIRPTA reforms such as those in H.R. 2128 — legislation introduced by Ways and Means Committee members Kevin Brady (R-TX) and Joseph Crowley (D-NY). The “Real Estate Investment and Jobs Act of 2015” would increase (from 5 percent to 10 percent) the ownership stake that a foreign investor can have in a U.S. publicly traded REIT without triggering FIRPTA liability (extending this provision to certain collective investment vehicles); and exempt foreign tax-exempt pension funds from FIRPTA altogether. 

“By providing relief from FIRPTA, the Brady-Crowley bill will spur domestic real estate investment, create jobs and help provide the capital we need to rebuild the nation’s crumbling infrastructure,” said Roundtable President and CEO Jeffrey D. DeBoer. Since the bill’s re-introduction in April, 31 (of 39) Ways & Means Committee members have signed on as co-sponsors.

Earlier this year, the Senate Finance Committee unanimously passed legislation (S. 915) that contains a significant part of what The Roundtable and its coalition partners are seeking, in terms of FIRPTA reform. Also illustrating the strong bipartisan support for FIRPTA reform, the full House cleared similar legislation in 2010 by a vote of 402-11. 

Because of the close connection between FIRPTA and infrastructure investment, the Administration included a FIRPTA reform proposal in its 2013 Rebuild America infrastructure initiative, and in its last three budget submissions to Congress.