Republican Members Propose Shortening Depreciation Period of Buildings

Modern buildings and American flag

Legislation introduced by a handful of influential Republicans in the House and Senate would shorten the depreciation period for structures to 20 years and adjust depreciation deductions upwards every year to account for inflation and a real rate of return on capital. (Tax Notes, April 13) 

Legislation vs. Biden Budget Proposal 

  • The Renewing Investment in American Workers and Supply Chains Act was introduced in the House by senior Ways and Means Committee Member Jackie Walorski (R-IN) and Republican Study Committee Chairman John Banks (R-IN). Senator Mike Braun (R-IN) introduced companion legislation in the upper chamber. (Joint news release, April 11)
  • The bill would reduce the cost recovery period for nonresidential property from 39 years to 20 years, and for residential rental property from 27.5 to 20 years.
  • In addition to shortening depreciation periods, the bill would enhance depreciation deductions by providing an adjustment for inflation and a return on capital (3%). The deduction adjustment would not be counted against the property’s basis or for purposes of depreciation recapture.
  • The changes would not be limited to new construction, but would apply to existing properties (adjusted for remaining basis), as well as properties that change ownership.
  • The nonpartisan Tax Foundation, a highly regarded research institution in Washington, estimated the bill would boost long-run GDP by 1.2 % and expand employment by 230,000 full-time equivalent jobs. Over the current 10-year budget window, when factoring in the positive macroeconomic feedback, the policy would increase federal revenue by $126.6 billion. (Tax Foundation, March 24)
  • The legislation stands in stark contrast to President Biden’s proposed budget, which would raise the tax burden on structures by eliminating the reduced 25% tax rate that applies to recaptured depreciation deductions when a property is sold. The Biden budget would tax depreciation recapture at a rate of 39.6%. (Roundtable Weekly, April 1)

The release of President Biden’s second budget launched the annual congressional appropriations process, which aims to fund the FY23 government budget starting Oct. 1. The prospects for tax increase proposals before the Nov. 8 mid-term elections are highly uncertain. (Politico, March 28 – “Here’s what’s in Biden’s $5.8 trillion budget proposal – and what’s next”)

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Legislators Introduce Bipartisan Bill to Reform Opportunity Zone Incentives

Senator Tim Scott interview on Opportunity Zones

Members of Congress introduced bipartisan, bicameral legislation yesterday to update and amend the Opportunity Zones (OZs) program. If enacted, the bill would extend expired OZ benefits, sunset certain high-income OZ census tracts, and apply additional information reporting requirements for opportunity funds and their investors. (Congressional news release, April 7)

OZ Reforms

  • The Opportunity Zones Transparency, Extension, and Improvement Act was introduced in the Senate by Tim Scott (R-SC), above, and Cory Booker (D-NJ) – and in the House by Ron Kind (D-WI) and Mike Kelly (R-PA). (Full text of the legislation | One-page summary | Section by Section).

  • The bill includes a Roundtable-requested, 2-year extension of the initial capital gains deferral period for prior gain that is rolled into an opportunity fund by an investor. (Roundtable Comment letters: Dec. 21, 2021 and May 14, 2020)

  • The 2-year extension, from the end of 2026 until the end of 2028, will allow OZ investors to benefit from a partial step-up in basis that reduces their tax liability on their prior gain if their opportunity fund investment is maintained for at least 5 years. The extension would help OZs continue attracting capital and investment that is boosting job growth and supporting the local tax base in these communities. 

  • Other provisions include a detailed process for sunsetting certain high-income census tracts from the OZ program; new information reporting rules for Opportunity Funds and investors; and creation of a $1 billion State and Community Dynamism Fund to support OZ projects and businesses in underserved communities.
Maryland Opportunity Zone event photo
  • Census tracts subject to the sunset provision include those with a median family income that exceeds 130 percent of the national median. The sunset includes transition rules that grandfather in existing and planned investments.

  • The information reporting proposals were previously introduced by Senator Scott in 2019. They aim to improve program transparency and facilitate improved tracking of the OZ investment outcomes in the designated communities. The Roundtable and other real estate organizations previously encouraged Congress to adopt enhanced OZ information reporting, data collection, and transparency measures. (Roundtable Comment letter: Dec. 21, 2021)

  • In the short time since their enactment, Opportunity Zones have created jobs and spurred billions of dollars in new investment in economically struggling communities. The Roundtable worked closely with Members of Congress and the Treasury Department to ensure OZ implementing regulations would facilitate the program’s success, and has long-supported OZ legislation that could spur greater investment, promote capital formation and bolster job growth in economically disadvantaged communities. (Roundtable Weekly: May 15, 2020 and  (Roundtable Comment letter: Dec. 21, 2021

In the current legislative environment, prospects for the new bill are uncertain, but it will likely be the basis for any serious consideration of OZ changes going forward.  

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Biden Administration Submits FY2023 Budget to Congress, Proposes Tax and Other Measures Impacting Real Estate

Budget FY23 visual

The Biden administration on Monday released its $5.8 trillion FY2023 Budget, a package of spending, tax, and policy proposals that will face extensive congressional scrutiny and revisions over the coming months. The March 28 budget was accompanied by the Treasury Department’s “Greenbook,” which details the Administration’s $2.5 trillion in tax increases on corporations, high-earning households, and certain business activities, including real estate investment. (New York Times and BGov, March 29) 

Billionaire Minimum Income Tax 

  • The new budget proposes to tax the wealthiest households on their unrealized capital gains, including real estate. The so-called “Billionaire minimum income tax” would impose a minimum levy of 20 percent on a comprehensive tax base that includes both realized income and the unrealized annual appreciation of a taxpayer’s assets.
  • The new tax would apply to future appreciation of assets and all unrealized, built-in gains at the time of enactment. The tax on pre-enactment, built-in gains would be collected over a 9-year transition period.
  • Although marketed as a tax on “billionaires,” the proposal would apply to any taxpayer with $100 million or more in wealth. This initial high threshold arguably represents a first step towards a wealth tax regime with much broader application. The original income tax applied to the top 1/3 of one percent of the U.S. population and now applies to over 150 million American households.
  • In certain cases, holders of illiquid assets like real estate could elect to defer the minimum tax until the property is sold, provided they pay an additional charge.
  • The budget leaves many of the most difficult questions unanswered, including:
     

    • How would the tax survive a constitutional challenge on the grounds that direct taxes must be apportioned among the states by population?
    • Why would taxpayers continue to make patient, long-term investments, knowing that they could be taxed before the investment generates cash income?
    • Will much of the tax burden fall on noneconomic inflationary increases in asset values? 
    • How will the IRS administer the tax without building a highly intrusive compliance system that is based on subjective valuation measures?
  • Another new revenue proposal in the budget relates is to tax depreciation recapture at ordinary income rates. The provision generally would treat gain on real estate held for more than one year as ordinary income to the extent of cumulative depreciation deductions taken in tax years beginning after 2022. Depreciation recapture is currently taxed at a rate of 25 percent.

The White House with Washington Monument

  • The White House budget also includes tax proposals recycled from last year that failed to pass congressional budget negotiations, including:
    • repealing the deferral of gain from real estate like-kind exchanges;
    • taxing long-term capital gains at ordinary income rates;
    • taxing carried interest in real estate partnerships as ordinary income; and
    • treating transfers of property at death as realization events subject to capital gains tax.

Immediate Congressional Pushback

  • The spending and revenue proposals faced immediate pushback on Capitol Hill by Republicans and Democrats, including Sen. Joe Manchin (D-WV), a key centrist who stated he opposes President Biden’s 20% minimum tax on unrealized capital gains for households worth at least $100 million. (CQ News, March 29)
  • Manchin told The Hill, “You can’t tax something that’s not earned. Earned income is what we’re based on. Everybody has to pay their fair share, that’s for sure. But unrealized gains is not the way to do it, as far as I’m concerned.”
  • Manchin also recently stated he is open to negotiating some limited remnants of the defunct Build Back Better (BBB) Act, with a focus on energy-related incentives, prescription drug costs ,and deficit reduction. (Business Insider, March 24) 

Other Measures Directly Affecting Real Estate 

President Joe Biden

  • Biden budget proposals impacting other aspects of The Roundtable’s 2022 Policy Agenda include:
     

    • Energy and Climate – the president’s budget request outlines $44.9 billion for increased spending on several climate-related initiatives, yet does not address specific clean energy provisions that were part of last year’s BBB bill. Instead, a “deficit neutral reserve fund” is noted in the FY23 budget to accommodate a potential future deal on clean energy legislation with Democratic Sens. Joe Manchin (D-W.Va.) and Kyrsten Sinema (D-AZ). (E&E News, March 28 and Axios Generate, March 29)
    • Affordable Housing – the FY23 budget seeks to ease the nation’s affordable housing shortage with $50 billion in federal funding for housing construction and supply, including $35 billion for state and local housing finance agencies. (PoliticoPro, March 28)
    • SEC Reporting Requirements – The Securities and Exchange Commission would receive $2.15 billion in the FY2023 budget proposal, an 11.4% increase from FY2021 (BGOV, March 28). The SEC has ramped up its activity recently with proposed rules on reporting requirements for investment advisers, climate risks and cybersecurity incidents that may have significant impacts for the real estate industry. 

Issues outlined in The Roundtable’s recently released 2022 Policy Agenda in the areas of tax, climate, capital and credit and cybersecurity will be discussed during the April 25-26 Spring Meeting (Roundtable-level members only) in Washington DC. 

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State and Local Tax (SALT) Deduction Relief in Doubt as Democrats Seek to Narrow Build Back Better Act

SALT by congressional district - CRS image

Several Democratic Senators favor retaining current law as it relates to the deductibility of state and local taxes and eliminating SALT relief from any pared down version of the Build Back Better (BBB) Act, The Hill reported on Jan. 26. 

SALT Fix

  • Speaking both on the record and anonymously to The Hill, policymakers said that they expect proposed changes to SALT will be cut from the next generation of the BBB Act, despite the issue being a top priority of Senate Majority Leader Chuck Schumer (D-NY).
  • The 2017 Tax Cuts and Jobs Act limited the itemized, individual deduction for state and local taxes (including property taxes) to $10,000. The provision does not restrict the deductibility of business taxes paid or incurred at the entity level. The limitation expires after 2025. (The SALT Cap: Overview and Analysis, Congressional Research Service, March 6, 2020)
  • Sen. Joe Manchin (D-WV), a key centrist vote in the Senate, has not publicly stated his position on SALT relief, but reportedly has sent signals he is not a supporter. (Politico, Jan. 27 and Roll Call, Jan. 28)

SALT & BBB

Build Back Better phone on map

  • If negotiations resume, congressional Democrats are expected to reduce the size and scope of the BBB Act. Manchin recently said he prefers “starting from scratch” after Democratic negotiations on the House-passed $2.2 trillion package collapsed in December. (Roundtable Weekly, Jan. 21)
  • There are also challenges in the House, where Democrats have only a four-vote majority. “No SALT, no deal,” wrote New York Rep. Tom Suozzi and New Jersey Reps. Josh Gottheimer and Mikie Sherrill in a joint statement last week. “If there are any efforts that include a change in the tax code [in a revised BBB proposal], then a SALT fix must be part of it.” (CNBC, Jan. 21)

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Roundtable Members Engage Policymakers on Economic, Energy, ESG and Other National Issues

Capitol from upper Pennsylvania Avenue

The Real Estate Roundtable’s Virtual 2022 State of the Industry (SOI) Meeting this week included discussions with national policymakers and industry leaders on the future of the Build Back Better (BBB) Act, the Fed and monetary policy, energy policy, regulatory oversight of ESG reporting, along with equity, diversity and inclusion issues in CRE. The Roundtable’s policy advisory committees also met, drilling down on timely issues with policy and industry experts in the areas of tax, sustainability, capital and credit, and homeland security.

Speakers & Policy Issues

Virtual SOI 2022 DeBoer and Fish

Roundtable Chair John Fish (Chairman and CEO, Suffolk), right, and Roundtable President and CEO Jeffrey DeBoer, left, launched the meeting and led discussions with three U.S. Senators and other prominent policymakers, including:

  • Sen. John Thune (R-SD)
    Senate Republican Whip
    Committees: Senate Commerce, Finance, Agriculture
    … joined Roundtable Board Member Ross Perot. Jr. (Chairman, Hillwood) to discuss upcoming Senate legislation and the political outlook.
  • Sen. Amy Klobuchar (D-MN)
    Committees: Joint Economic, Senate Commerce, Judiciary, and Rules
    …  expressed her support for the recently-enacted bipartisan infrastructure bill and additional pandemic aid for the hard-hit tourism industry and hospitality sectors.
  • Sen. Catherine Cortez Mastro (D-NV)
    Committees: Senate Finance, Banking, and Energy
    … noted her support for expanding the low-income housing tax credit to build affordable homes for working families, along with business incentives to invest in energy efficiency projects.
  • John Kerry
    President Biden’s Special Envoy for Climate and former Secretary of State
    … discussed the significant role of the real estate industry in efforts to combat the impact of climate change and emphasized the need for nations to adopt new green energy technologies.
  • Larry Summers
    Former Treasury Secretary under President Clinton and Former White House National Economic Council Director under President Obama

    … discussed a wide range of policy topics, including his views on the Fed’s reaction to market volatility, inflation, and the tight labor market. (Watch Summers video)

Equity, Diversity & Inclusion

Roundtable SOI 2022 Virtual E,D&I discussion

  • The SOI meeting also included a discussion about exploring a potential industry initiative that would aim to accelerate opportunities for minority and women business enterprises (MWBEs) in the commercial real estate industry.
  • The goals of the initiative were discussed by The Roundtable’s Equity, Diversity and Inclusion (E,D&I) Committee Chairman, and Roundtable Board Member, Jeff Blau (CEO, Related Companies); Ken McIntyre, CEO of The Real Estate Executive Council; and Thomas Baltimore, Jr., Chairman, President and CEO of Park Hotels & Resorts.

Roundtable Policy Advisory Committees

RER's Duane Desiderio and SPAC Chair Tony Malkin

(Above: Sustainability Policy Advisory Committee (SPAC) Chair Tony Malkin (Chairman, President and CEO, Empire Realty Trust), right, and Roundtable SPAC Liaison, Senior Vice President and Counsel Duane Desiderio, left.)

The Roundtable’s policy advisory committee meetings on Jan. 25-26 analyzed national issues impacting CRE, including:

  • Research and Real Estate Capital Policy Advisory Committees (RECPAC)

    Rep. French Hill (R-AR) provided his insights on the congressional legislative agenda from his perspective as a member of the House Financial Services Committee and Ranking Member of its Subcommittee on Housing, Community Development and Insurance. Research Committee co-chairs Spencer Levy (CBRE’s Global Chief Client Officer) and Paula Campbell Roberts (KKR Managing Director) provided their perspectives on real estate capital markets. RECPAC co-chair Kathleen Farrell, Head of Commercial Real Estate for Truist, moderated a joint committee meeting capital market discussion, along with co-chairs Gregg Gerken, Head of Commercial Real Estate with TD Bank, and Mike Lowe, Co-CEO with Lowe.

  • Tax Policy Advisory Committee (TPAC)

    Potential tax revenue policies that may be considered by Congress were a focus of a discussion moderated by Russ Sullivan (Brownstein Hyatt Farber Schreck) with Bethany Bell, staff director for the House Ways and Means Subcommittee on Select Revenue Measures. Additionally, Derek Theurer, chief tax counsel for Ways and Means’ Republicans, discussed tax legislative priorities prior to the upcoming mid-term elections.

  • Homeland Security Task Force (HSTF)

    HSTF members were briefed on the escalation of organized “smash and grab” looting incidents affecting the retail sector by Dan Kennedy, Senior Vice President of US Security Operations for Unibail-Rodamco-Westfield, Chris Woiwode, Vice President and Chief Security Officer for Macerich and Terry Monahan, former New York City Senior Advisor for Recovery Safety Planning and NYPD Department Chief. Additionally, HSTF co-chairs Amanda Mason (Executive Director of Global Intelligence for the Related Companies) and Keith Wallace (Vice President for Global Safety & Security with Marriott International) led HSTF in a discussion on current threats to CRE and mitigation strategies. (HSTF on Jan. 20 held a virtual exercise simulating hostile events and adverse weather impacting CRE).

  • Sustainability Policy Advisory Committee (SPAC)

    Environmental Protection Agency (EPA) staff demonstrated a new, powerful Building Emissions Calculator to estimate historical, current and future annual greenhouse gas emissions resulting from a building’s energy use. SPAC also discussed the SEC’s expected rule on Environmental, Social, and Corporate Governance (ESG) reporting requirements. (Reuters, Jan. 19).  Additional speakers from the U.S. Energy Information Administration provided an update on the Commercial Building Energy Consumption Survey (CBECS), which tracks federal data on U.S. CRE energy use.

Next on The Roundtable’s FY2022 meeting calendar is the Spring Meeting on April 26. This meeting is restricted to Roundtable-level members only.

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Roundtable Offers 2022 Tax Policy Overview in CBRE’s Market Outlook Podcast

CBRE podcast visual

How national tax policies may affect commercial real estate and the outlook for market sectors were the focus this week of a CBRE podcast, “High Hopes: Why Commercial Real Estate Is Poised for Continued Growth in 2022” that included Roundtable Senior Vice President & Counsel Ryan McCormick. 

Tax Policy Issues  

  • McCormick emphasized that tax increase proposals affecting CRE could receive renewed attention in 2022 if the President, congressional leaders, and key centrist Democrats sit down to renegotiate major elements of the Build Back Better Act. (CBRE Podcast, Jan. 11)
  • “We started last year with a tremendous amount of potential change on the table, potential risks for real estate,” including “changes to the taxation of capital investment, capital formation, capital gains . . . pass-through rates and just rates generally,” McCormick noted.  In his initial budget, the President proposed “limiting like-kind exchanges, eliminating the step-up in basis of assets at death, and other changes,” he added.
  • As the process unfolded, according to McCormick, the real estate industry was able to demonstrate the negative impact these proposals “would have on not just real estate in particular, but local communities, local governments, property tax revenue at the state and local level and the jobs that flow from those industries and those services that are provided.” (CBRE Podcast, Jan. 11)
  • Congressional lawmakers, driven by the need to get the key approval vote of Sen. Joe Manchin (D-WV) in an evenly divided Senate, are likely to pare back the cost of the $1.75 billion BBB bill to restart negotiations.  (Roundtable Weekly, Jan. 7)
  • McCormick added, “The Build Back Better Act is hanging by a thread at this point, and it’s really going back to the drawing board. . . .  There’s a lot of different ways and directions things could take.  They could go small.  They could try to do something on a bipartisan basis.  I think the most likely scenario is they whittle back the Build Back Better Act further from where it is today. . . . [I]n many respects, we’re back where we started in 2021.”  

The SEC, OZs and SALT 

construction crane city background

  • The discussion also touched on the growing influence of ESG factors on the industry, including the expectation that the Securities and Exchange Commission (SEC) may release a proposed rule for reporting financial risks related to climate during the first quarter of this year. (Roundtable Weekly, Oct. 1, 2021)
  • McCormick expressed optimism that political support for Opportunity Zones, which have raised over $75 billion in capital since their enactment in 2017, would grow over time.  The Roundtable and other stakeholders recently urged Congress to extend deadlines for investors to qualify for OZ tax benefits.  On Thursday, Senate Finance Committee Chairman Ron Wyden announced an investigation into the impact of OZs on jobs and investment in low-income communities (Roundtable Weekly, Jan. 7; Wyden press release, Jan. 13)
  • The fate of the deductibility of state and local taxes (SALT) was also a topic in the CBRE podcast.  

Roundtable Speakers: Thune, Kerry and Summers 

Senator John Thune (R-SD) at podium

  • Tax policy in the new year will be a focus of The Roundtable’s Jan. 25 State of the Industry Meeting (remote) and its Tax Policy Advisory Committee (TPAC) meeting on Jan. 26.
  • Featured speakers at The Roundtable’s business meeting will include: Sen. John Thune (R-SD), the number two position in Senate Republican leadership;

    John Kerry, President Biden’s Special Envoy for Climate and former Secretary of State; and 

    Larry Summers, former Secretary of the Treasury and former Director of the White House National Economic Council. 

Looking Ahead 

CBRE-2022-report-cover

  • The Jan. 11 CBRE podcast – moderated by Spencer Levy, CBRE’s Global Chief Client Officer & Senior Economic Advisor and co-chair of The Roundtable’s Research Committee – also featured Richard Barkham, CBRE’s Global Chief Economist, Head of Global Research & Head of Americas Research. Barkham focused on the economic outlook and forecasts for capital markets and individual CRE sectors. (GlobeSt, Jan. 12)
     
  • CBRE’s recently released publication, U.S. Real Estate Market Outlook for 2022, projects a growing U.S. economy will fuel demand for space and increase real estate investment across all property types – despite uncertainty from the omicron variant and other risks. 

The Real Estate Roundtable’s Policy Agenda for 2022, scheduled for release at the end of this month, will address the tax issues above and several more of importance to CRE in the areas of infrastructure, sustainability, capital and credit, and homeland security. 

#  #  # 

Congress Extends Government Funding Until February 18, Faces Debt Ceiling Deadline; Senators Begin Consideration of Build Back Better Act

Capitol from upper Pennsylvania Avenue

A Continuing Resolution (CR) that would fund the government until Feb. 18 passed the House yesterday and the Senate last night, sending the bill to President Biden for his signature to avoid a partial government shutdown at midnight. (CNBC, Dec. 2). Senate leaders this week also continued negotiations to extend the national debt ceiling to avoid default and began discussions about potential changes to the House-passed $1.7 trillion Build Back Better (BBB) Act. [Further Extending Government Funding Act (H.R. 6119) and section-by-section summary]

Debt Ceiling Looms

  • Treasury Secretary Janet Yellen and the Congressional Budget Office this week urged Congress to increase the debt ceiling as soon as possible to avoid a national default in December. (Bloomberg, Nov. 30)
  • Yellen testified Monday before the Senate Banking Committee about the need to increase the debt limit. She stated, “If we do not, we will eviscerate our current recovery. In a matter of days, the majority of Americans would suffer financial pain as critical payments, like Social Security checks and military paychecks, would not reach their bank accounts, and that would likely be followed by a deep recession.” (The Hill, Nov. 30 and Yellen testimony)
  • Senate Majority Leader Chuck Schumer (D-NY) and Senate Minority Leader Mitch McConnell (R-KY) expressed optimism this week about their discussions to raise the federal government’s $28.9 trillion debt limit soon. (Reuters, Nov. 30)

BBB Act & Tax Issues

House Ways and Means Chairman Richard Neal (D-MA)
  • House Ways and Means Chair Richard Neal (D-MA), above, on Wednesday stated that a vote on the BBB package may be pushed into next year, given the urgent agenda Congress faces this month. (BGov, Dec 1)
  • The House-passed BBB Act and its potential impact on the taxation of real estate was also the focus of a Nov. 30 report in Commercial Property Executive – “Tax Policy Largely Stays the Course for CRE Execs.” Roundtable President and CEO Jeffrey DeBoer was quoted in the article – “I think that there has been a clash between expectations and reality. Expectations were high because Biden won, he had a Democratic House, and the Senate was 50/50. But the reality is that none of these issues are easy.”
  • The current BBB bill – when compared to the President’s budget and the bill passed by the House Ways and Means Committee in September – reflects major progress on a number of tax issues important to real estate and prioritized by The Real Estate Roundtable.  (Roundtable Weekly, Oct. 29)
  • The current bill would not limit like-kind exchanges, increase the 20% capital gains tax, or cap eligibility for the 20% pass-through business income deduction.  It also does not include changes in the tax treatment of carried interest or repeal the step-up in basis of assets at death.  The key tax issues in the bill are addressed in a Roundtable comparison of the tax-related provisions in the BBB package. 

Green Energy Provisions

Bloomberg Center energy efficiency canopy
  • The Senate this week also began consideration of the BBB Act following the House’s passage of the multitrillion-dollar legislation on Nov. 19. Clean energy tax credits make up the most significant portion of the BBB Act’s climate policies.
  • Schumer and Senate Energy and Natural Resources Chair Joe Manchin (R-WV) met this week to discuss climate policies in the House package. E&E News reported, “Manchin said he is negotiating ‘adjustments’ to the energy and climate provisions of his party’s $1.7 trillion social spending bill, in what could be part of a larger suite of changes to the legislation as it moves through the Senate.”
  • The Roundtable on Nov. 16 sent a letter to congressional tax writers detailing five recommendations that would improve green energy tax provisions in the BBB Act affecting real estate.  (Roundtable Weekly, Nov. 19)
  • The letter’s recommendations, listed below, would increase and scale deployment of low- and zero-carbon technology in the nation’s commercial and multifamily building infrastructure.
  1. Clarify that “thermal energy storage systems” are eligible for incentives under the Section 48 Investment Tax Credit.
  2. Further revise the 30C tax credit to support EV chargers in the non-public, but widely used, parking lots and garages that serve America’s residential and business tenants who seek to conveniently “charge-up” while at home or at work.
  3. Better align the BBB Act with the Biden Administration’s long-term climate strategy – by providing accelerated depreciation and other incentives for heat pumps and other components that “electrify” commercial and multifamily buildings.
  4. Induce more “retrofits” of aging buildings by allowing taxpayers to claim the 179D deduction in the year high-efficiency equipment is placed in service.
  5. The inclusion of Davis-Bacon and apprenticeship hiring will seriously undermine climate goals – because the high costs to comply with these labor standards will more than offset the BBB Act’s “bonus rates” for clean energy projects. Congress should not hinge the “bonus rates” on unrelated labor issues that fail to accelerate achievement of GHG reduction strategies. 

Fiscal policy, the BBB Act and how it may affect tax and climate issues of importance to CRE will be topics for discussion at The Roundtable’s Jan. 25-26 State of the Industry Meeting in Washington, DC. 

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House Passes Build Back Better Act, Roundtable Urges Improvements to Green Energy Tax Provisions

Capitol reflective glass morning

House Democrats passed their “sweeping” reconciliation package of tax, health care, education, and climate initiatives Friday morning, a step that advances a “centerpiece” of President Biden’s domestic agenda and represents “the most significant restructuring of the [social] safety net in decades.” (Politico, Nov. 19)

President Biden lauded the House’s action in a statement released by the White House this morning.

Partisan Bill Advances to the Senate

  • All Democrats (except one) supported the $1.7 trillion Build Back Better Act (H.R. 5376), after months of negotiations between Progressives and Moderates debating the breadth of the measure and scaling back its original price tag north of $3.5 trillion. (Roundtable Weekly, Nov. 5) No House Republican voted for the bill.
  • Today’s party-line vote took place after the Congressional Budget Office submitted a cost analysis that satisfied the requirements of a crucial group of Democratic Moderates needed to approve the legislative package. (CBO, Nov. 18 and text of the budget reconciliation bill.)
  • The legislation now moves to the Senate where it will face additional scrutiny and could be reduced further in scope. If the Senate ultimately passes the BBB Act in a manner that changes the House-approved version, the bill would need to go back to the House for another vote before it reaches President Biden’s desk.
  • Passage of the BBB Act follows on the heels of the enactment of the bipartisan bill to upgrade the nation’s transportation, water, grid, broadband, and other “physical” infrastructure. President Biden signed the $1.2 trillion Infrastructure Investment and Jobs Act into law on Monday. (Washington Post, Nov. 15). The Roundtable has strongly supported bipartisan investments to modernize the nation’s physical infrastructure. (Roundtable Weekly, Nov. 12).

Progress on CRE Tax Issues

San Francisco buildings

  • Relative to President Biden’s budget and the initial bill passed by the Ways and Means Committee, the House-passed BBB Act reflects continued progress on a number of tax issues important to real estate and prioritized by The Real Estate Roundtable. (Roundtable Weekly, Oct. 29) Critically, the current bill does not:     
     
    • Limit like-kind exchanges (sec. 1031),
    • Increase the capital gains tax rate,
    • Restrict the 20% pass-through business income deduction (sec. 199A),
    • Tax unrealized gains at death or repeal of the step-up in basis of assets,
    • Change the tax treatment of carried interest, and
    • Restrict estate tax valuation discounts.

Roundtable Recommends Changes to Clean Energy Tax Provisions

Alternative Energy source CRE

  • The BBB Act’s suite of clean energy tax credits and incentives comprise the legislation’s biggest measures to fight climate change. (Roundtable Weekly, Oct. 29)
  • The Roundtable sent a letter to Congressional tax writers on Tuesday detailing five recommendations that aim to improve green energy tax provisions affecting real estate. The Roundtable’s letter urged changes to the BBB Act that would further the objectives to slash GHG emissions and make rapid progress toward a “net zero” economy by mid-century. (Roundtable letter, Nov. 16)
  • The letter’s recommendations, listed below, would increase and scale deployment of low- and zero-carbon technology in the nation’s commercial and multifamily building infrastructure.
  1. Clarify that “thermal energy storage systems” are eligible for incentives under the Section 48 Investment Tax Credit.
  2. Further revise the 30C tax credit to support EV chargers in the non-public, but widely used, parking lots and garages that serve America’s residential and business tenants who seek to conveniently “charge-up” while at home or at work.
  3. Better align the BBB Act with the Biden Administration’s long-term climate strategy – by providing accelerated depreciation and other incentives for heat pumps and other components that “electrify” commercial and multifamily buildings.
  4. Induce more “retrofits” of aging buildings by allowing taxpayers to claim the 179D deduction in the year high-efficiency equipment is placed in service.
  5. The inclusion of Davis-Bacon and apprenticeship hiring will seriously undermine climate goals – because the high costs to comply with these labor standards will more than offset the BBB Act’s “bonus rates” for clean energy projects. Congress should not hinge the “bonus rates” on unrelated labor issues that fail to accelerate achievement of GHG reduction strategies.

Next: The Senate in December

U.S. Capitol evening

  • The Senate will take up the House BBB bill in December. Democrats will need the support of moderate Senators Joe Manchin (D-WV) and Kyrsten Sinema (D-AZ) to pass BBB legislation in the evenly divided upper chamber using budget reconciliation rules. However, Manchin recently stated he may withhold his support of the bill until next year due to rising inflation rates. (Newsweek, Nov. 16 and Axios, Nov. 10)
  • Additionally, House lawmakers included six pages of technical changes in their BBB bill that could help it pass the scrutiny of the Senate Parliamentarian, who can remove certain House provisions if she determines they are incompatible with Senate rules.

Congress is scheduled to return from the Thanksgiving break on Dec. 3. Treasury Secretary Janet Yellen this week warned that if lawmakers do not take action to lift the legal debt ceiling by Dec. 15, they will risk a government default on its debt obligations. (Wall Street Journal, Nov. 16) 

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

DC landscape

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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Democrats Struggle to Reach Agreement on “Social Infrastructure” Package as Roundtable’s DeBoer Addresses Real Estate Tax Issues in Play

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Democrats this week struggled to reach agreement on cutting the cost of President Biden’s multitrillion “social infrastructure” proposal as Senator Kyrsten Sinema (D-AZ) opposed any increase in marginal rates for businesses, high-income individuals or capital gains to pay for the package. Democrats aim to pass both the “human” and “physical’ infrastructure packages under a budget reconciliation process that requires approval of all 50 Democrats in the evenly divided Senate. (Wall Street Journal, Oct. 20) 

CRE Impact 

Jeffrey DeBoer, Real Estate Roundtable President and CEP

  • Real Estate Roundtable President and CEO Jeffrey DeBoer (above) yesterday addressed the fluid nature of the reconciliation bill negotiations during a Marcus and Millichap tax policy webinar. The webcast is available here, but you must be registered to access the discussion.
  • DeBoer noted that the narrow voting margins in both the Senate and House have created an environment where it is difficult for various factions in Congress to reach consensus. “What we have here is a clash between expectations and reality,” DeBoer said.
  • He added that the current policy disputes among lawmakers adds uncertainty to the potential outcome. “Could negative tax provisions affecting real estate be put back on the table? Absolutely. What also worries me is that other proposals that we don’t know about yet may suddenly be considered.” (Registration required to view the Marcus & Millichap webcast)
  • The House Ways and Means Committee voted in September to advance legislation that would finance Biden’s social infrastructure initiatives with a $2.1 trillion tax increase focused on high-income individuals and corporations. The House legislation excluded several tax proposals put forward by the Biden administration and Senate lawmakers that would increase the tax burden on real estate. (Roundtable Weekly, Sept. 17)
  • The Washington Post today reported that a new “Billionaire Income Tax” proposal from Senate Finance Chair Ron Wyden (D-OR) would “aim to raise hundreds of billions of dollars from the fortunes of America’s roughly 700 billionaires” by applying a tax to those individuals earning over $100 million in income three years in a row. Taxes would be imposed on the increased value of assets such as stocks on an annual basis, regardless of whether those assets are sold. Billionaires would also be able to take deductions for the annual loss in value of those assets. (Washington Post, Oct 22)
  • Additional tax issues affecting CRE are profiled in The Roundtable’s summary on Real Estate Tax Issues and Budget Reconciliation Legislation.   

Tax Uncertainty 

Kyrsten Sinema

  • The Senate has not acted on any revenue-raising proposals to support President Biden’s original $3.5 trillion infrastructure package. Policymakers are now aiming to pare down the overall reconciliation bill cost to approximately $2 trillion before finalizing measures to pay for the package.
  • Sen. Sinema (above) yesterday spoke with House Ways and Means Committee Chairman Richard Neal (D-MA) in an effort to break the impasse on how to fund certain infrastructure spending priorities in a scaled-down package. Neal said he is optimistic a deal will be reached. “I did point out that it’s the ninth inning. I mean, when are you going to vet these issues?” Neal said. (The Hill, Oct. 21)
  • The current reconciliation bill in the House would raise the top marginal income tax rate on many pass-through business owners from 29.6% today to 46.4% (a 57% increase). The Roundtable believes this level of increase on pass-through businesses was unintended by Members of Congress and could undercut the bill’s own objectives. 

As negotiations continue among policymakers on a reduced topline number for the social infrastructure package – and the specific programs it would support within a multi-trillion reconciliation bill – The Roundtable continues to urge lawmakers to ensure that any tax changes within a final agreement treats pass-through businesses fairly and equitably. (Roundtable Weekly, Oct. 1 and Oct. 15

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