Policy Issues

Roundtable Asks Treasury to Clarify Real Estate Exception to New Limit on Business Interest Deductibility

February 26, 2019

View letter

The Real Estate Roundtable wrote to the Treasury Department and IRS about the new limitation on business interest deductibility enacted in the Tax Cuts and Jobs Act of 2017 (TCJA).  The provision allows qualifying businesses to continue fully deducting interest related to commercial real estate debt. 
 

Roundtable President & CEO Jeffrey DeBoer sent the detailed comments as Treasury officials work to finalize proposed regulations implementing TCJA's new section 163(j), which limits the deductibility of business interest to no more than 30% of modified, adjusted taxable income.  Section 163(j) includes a critical exception for real estate.

DeBoer notes in The Roundtable's Feb. 26 letter, "In light of the clear legislative intent to enact a broad real estate exception and its importance to the health and stability of real estate markets, the final Treasury regulations should build on the proposed rules and not limit unnecessarily the ability of a real property trade or business (RPTOB) to elect out of the provisions of section 163(j)."

The letter includes detailed comments on several 163(j) implementation issues and makes the following recommendations:

  • The real estate exception should extend through all "tiered" investment structures. 
  • The real estate exception should apply fully to non-rental activities. 
  • Treasury regulations should not "whipsaw" corporations/REITs through conflicting definitions of a "trade or business" that can effectively block their ability to use the real estate exception. 
  • Treasury regulations should modify the anti-abuse rule for related-party leases. 
  • The small business exception should not prevent otherwise eligible partners from qualifying for the real estate exception. 
  • Debt allocation rules should not undercount real estate assets for purposes of the real estate exception.
  • Treasury regulations should confirm that senior housing constitutes a real property trade or business.