Opportunity Zones (OZs) – The Real Estate Roundtable

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Business-Related Property Taxes

Capital Gains

Like-Kind Exchanges (LKEs)

Partnerships & Pass-Through Taxation

Carried Interest

Opportunity Zones (OZs)

Step-Up in Basis

Unrealized Gains ("Billionaire Tax")

Tax

Business-Related Property Taxes

A cap on property tax deductibility could have devastating consequences for commercial real estate owners, developers, and investors nationwide.

Republican lawmakers intend to enact a major tax and fiscal package this year, and they are under pressure to identify additional revenue offsets to finance a growing list of priorities. Some lawmakers have raised “Business SALT” and potential restrictions on the deductibility of state and local property and income taxes as a possible revenue offset for the tax bill.

The ripple effects of this proposal would extend far beyond property owners to impact the broader economy and housing affordability nationwide.

Tax

Capital Gains

Outside of one brief period, the United States has traditionally taxed long-term capital gains at a lower rate than ordinary income (wages, rent, and other compensation). Today, long-term capital gains are taxed at a top rate of 20%, but the rate rises to 23.8% if the income is subject to the 3.8% tax on net investment income. Currently, the net investment income tax applies to real estate gains earned by passive investors and not the income earned from the active conduct of professionals in real estate.

Tax

Like-Kind Exchanges (LKEs)

Like-kind exchange rules allow taxpayers to defer tax when they exchange one property held for investment or business use for another property of a “like kind.” Since 1921, the tax code has allowed taxpayers to defer capital gains on these exchanges. Today, LKEs are central to real estate markets and play a critical role in financing the improvement and modernization of U.S. real estate.

Tax

Partnerships & Pass-Through Taxation

Real estate generally is owned through “pass-through” entities that allow income to pass through to individual owners rather than taxing the income at the entity level. Partnerships promote and attract investment by allowing owners to allocate economic returns based on investors’ appetite for risk. Our pass-through tax and regulatory rules create greater flexibility in the ownership and operation of businesses, support risk-taking, and contribute to the economic dynamism that differentiates the United States from other countries.

Tax

Carried Interest

A “carried” interest is the interest in partnership profits a general partner receives from the investing partners for successfully managing the investment and bearing the entrepreneurial risk of the venture. Carried interest may be taxed as ordinary income or capital gain, depending on the type of revenue the partnership generates. Legislation proposing to change the tax treatment of carried interest has been introduced in various forms since 2007.

Tax

Opportunity Zones (OZs)

Created in 2017, Opportunity Zones (OZs) are designated, low-income census tracts where qualifying investments are eligible for reduced capital gains taxes. By channeling investment where it is needed, OZs help stimulate jobs and growth in low-income communities.

The three main OZ tax benefits were a deferral of prior capital gain rolled into an OZ fund, an increase (partial “step-up”) in the basis of the prior investment after a five or seven-year holding period and the exclusion of gain on the OZ investment after 10 years.

The final OZ regulations were issued four months before the COVID-19 lockdown. The tax benefits are gradually phasing down (the deferral of prior gain ends in 2026) and the partial basis step-up has expired for new OZ fund contributions.

In the last Congress, bipartisan House legislation (Reps. Mike Kelly, R-PA and Dan Kildee, D-MI; H.R. 5761) would extend OZ deadlines for two years, allow helpful “fund of funds” OZ tax structures, sunset certain high-income OZ census tracts and create new OZ information reporting and transparency rules
The renewal and reform of the OZ tax incentives is expected to be a major topic of discussion as Congress considers extension of the 2017 tax bill in 2025.

Tax

Step-Up in Basis

When an individual dies, the U.S. levies a comprehensive tax on his or her wealth and assets, including unrealized gains, through the estate tax. When wealth exceeds an exemption amount it is generally taxed at a rate of 40%. Separately, for income tax purposes, the basis of assets in the hands of an heir is “stepped up” to fair market value at the time of the decedent’s death.

Tax

Unrealized Gains ("Billionaire Tax")

President Biden and certain key lawmakers, including Senate Finance Committee Chairman Ron Wyden (D-OR), have proposed taxing gains on an annual basis, regardless of whether the asset has been sold.