Tag: Tax Policy

Biden Proposes Taxes on Real Estate Investments and 1031 Like-Kind Exchanges to Pay for Caregiving Plan

Posted on by Trey Jackson

Presumptive Democratic nominee Joe Biden on July 21 released a policy proposal to fund universal childcare and in-home elder care by taxing real estate investors and targeting the taxation of like-kind exchanges.  (The Real Deal July 21)

  • The proposal states that $775 billion would be raised over 10 years to pay for the plan “… by rolling back unproductive and unequal tax breaks for real estate investors with incomes over $400,000 and taking steps to increase tax compliance for high-income earners.” 
  •  A senior Biden campaign official added the plan would prevent investors from using real estate losses to lower their income tax bills and would take aim at the taxation of like-kind exchanges, according to a Bloomberg report. 
  • Real Estate Roundtable President and CEO Jeffrey DeBoer responded by noting the many ways in which like-kind exchanges contribute to economic growth and create greater opportunity for entrepreneurs from under-represented demographic groups.
  • “The long-standing like-kind exchange tax law has encouraged investment in affordable housing and other properties, generated state and local tax revenue, and spurred new jobs through labor-intensive property improvement.  Exchanges reduce the need for outside financing, leading to less leverage and debt on U.S. real estate. As a result, exchanges allow cash-strapped minority, women, and veteran-owned businesses to grow their business by temporarily deferring tax on the reinvested proceeds,” DeBoer said.
  • He added, “Like-kind exchanges are particularly important during economic downturns when access to capital is less certain. In short, like-kind exchanges create a more dynamic real estate marketplace, ensuring properties do not languish, permanently underutilized and under-invested. Congressional review of like-kind exchanges is reasonable and appropriate, and we will support sensible reforms, as The Roundtable has in the past, that preserve and maintain the provision’s broad-based economic benefits.”  (National Real Estate Investor, July 21)
  • “The Biden Plan for Mobilizing American Talent and Heart to Create a 21st Century Caregiving and Education Workforce” does not contain details on the specific changes to like-kind exchange (LKE) taxation.  (CNBC, July 21)

A 2015 economic study commissioned by The Real Estate Roundtable and other national real estate organizations on the US commercial real estate market highlights the critical role that 1031 exchanges play in stabilizing rents, safeguarding  property values and strengthening the economy.   (“The Economic Impact of Repealing or Limiting Section 1031 Like-Kind Exchanges in Real Estate” by Professors David C. Ling and Milena Petrova)  

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Republicans Seek Intra-Party Consensus on Coronavirus Aid as Unemployment Benefits Expire and Democrats Wait to Begin Negotiations

Posted on by Trey Jackson

The White House and Senate Republicans have reached an “agreement in principle” on GOP priorities for another COVID-19 relief package but legislative text is still in the drafting phase, as negotiations in earnest with Democrats have yet to commence. (The Hill, NPR, and Law 360, July 23)

  • Sen. Rob Portman (R-OH) outlined GOP priorities during a July 22 floor speech on the next COVID-19 bill. (News release and transcript of Portman’s comments and YouTube video.) Republicans are reportedly in broad agreement on issues such as a liability shield for businesses from frivolous COVID-related lawsuits, a new targeted round of forgivable Paycheck Protection Program (PPP) loans for small business, and funds to help schools re-open, but “[w]e’re still developing the bill,” said Senate Finance Committee Chairman Chuck Grassley (R-IA). (B-Gov, July 23)
  • The GOP proposal is also expected to include additional unemployment benefits that expire this month, but less than the $600 per week boost Congress approved in March as part of the CARES Act. (Roundtable Weekly, March 27 and July 17). Republicans’ next plan is expected to fall within the $1 to $1.5 trillion dollar range.
  • The Democratic starting point for negotiations is the $3.4 trillion HEROES Act (H.R. 6800) passed by the House of Representatives in May (See one-pager; section-by-section; state and local relief summary and Roundtable Weekly, May 22).  Speaker Nancy Pelosi (D-CA) expressed her conference’s perspective that the GOP’s relief proposal “falls very short of the challenge that we face in order to defeat the virus and to open our schools and to open our economy.” (July 23 news conference video, The Hill)

Healthy Workplaces Tax Credit

Bipartisan support is growing for a “re-opening tax credit” in the next COVID-19 response package, which could offer businesses assistance in helping defray extra costs associated with workplace cleaning, disinfecting, personal protective equipment, and virus testing. (The Hill, July 16 and Roundtable Weekly, July 17)

  • Legislation includes the Clean Start: Back to Work Tax Credit Act (H.R. 7079) – introduced by Reps. Darin LaHood (R-IL) and Stephanie Murphy (D-FL). The bill proposes a credit maximum of $250,000 per business entity, up to $25,000 per location. (LaHood news release, May 29)
  • LaHood discussed his tax credit proposal and other pandemic relief measures yesterday in a video discussion with Roundtable President and CEO, Jeffrey D. DeBoer.  Watch the July 23 LaHood discussion on The Roundtable’s Youtube channel.
  • Additionally,  Sen. Rob Portman (R-OH) this week introduced the Healthy Workplaces Tax Credit Act, which proposes a refundable payroll tax credit with a phased amount based on the number of a business’s employees that would cover 50% of costs associated with PPE, cleaning, disinfecting, testing, and reconfiguring workspaces (Portman news release , July 20).  Rep. Tom Rice introduced companion legislation in the House.      
  • A broad business coalition, including The Real Estate Roundtable, urged Congress on July 16 to include a “healthy workplaces” tax credit in the next coronavirus relief bill.  (Coalition letter,  July 16 and  Roundtable Weekly,  July 17) 

Liability Protections and Minority Credit Legislation

Governors from 21 states urged Congress this week to provide “common sense” civil liability protections to health care workers, businesses, and schools in the next COVID-19 response package. (Governors’ Letter, July 21)

  • Republican Senators have indicated liability protections remain a leading priority for inclusion in the next relief package.  A draft outline of the Senate’s new COVID-19-related liability protections for businesses proposes a five-year shield from coronavirus lawsuits. (The Hill, Fox Business, CBS News, and Roundtable Weekly, July 17)
  • The Senate summary reflects principals supported by The Roundtable that were part of a multi-sector coalition letter sent to Hill leadership on May 27.  (Roundtable Weekly, May 29)
  • Separately, Senate Minority Leader Charles Schumer  (D-NY) and Senators Mark Warner (D-VA), Cory Booker (D-NJ), and Kamala Harris (D-CA) introduced legislation on July 21 to invest $17.9 billion in low-income and minority communities especially hard-hit by the COVID-19 crisis.  Representative Gregory Meeks (D-NY) introduced companion legislation in the House.
  • The Jobs and Neighborhood Investment Act would provide eligible community development financial institutions (CDFIs) and Minority Depository Institutions (MDIs) with capital, liquidity, and operational capacity to expand the flow of credit into underserved, minority, and historically disadvantaged communities.
  • The sponsors aim to include the measure in upcoming COVID-19 relief legislation to help small businesses remain solvent and expand operations, while providing affordable access to credit for lower income borrowers.

Congress faces a tight deadline to address a multitude of economic and health policy issues related to COVID-19 in an omnibus bill before breaking for its August recess.  (The Hill, July 20)

Real Estate Roundtable Statement on Biden Like-Kind Exchange Proposal

Posted on by Trey Jackson

Presumptive Democratic nominee Joe Biden on July 21, 2020 released a policy proposal to fund universal childcare and in-home elder care by taxing real estate investors and targeting the taxation of like-kind exchanges.  Real Estate Roundtable President and CEO Jeffrey DeBoer responded by noting the many ways in which like-kind exchanges contribute to economic growth and create greater opportunity for entrepreneurs from under-represented demographic groups.

  • “The long-standing like-kind exchange tax law has encouraged investment in affordable housing and other properties, generated state and local tax revenue, and spurred new jobs through labor-intensive property improvement.  Exchanges reduce the need for outside financing, leading to less leverage and debt on U.S. real estate. As a result, exchanges allow cash-strapped minority, women, and veteran-owned businesses to grow their business by temporarily deferring tax on the reinvested proceeds,” DeBoer said.
  • He added, “Like-kind exchanges are particularly important during economic downturns when access to capital is less certain. In short, like-kind exchanges create a more dynamic real estate marketplace, ensuring properties do not languish, permanently underutilized and under-invested. Congressional review of like-kind exchanges is reasonable and appropriate, and we will support sensible reforms, as The Roundtable has in the past, that preserve and maintain the provision’s broad-based economic benefits.” 

A 2015 economic study commissioned by The Real Estate Roundtable and other national real estate organizations on the US commercial real estate market highlights the critical role that 1031 exchanges play in stabilizing rents, safeguarding  property values and strengthening the economy.   (“The Economic Impact of Repealing or Limiting Section 1031 Like-Kind Exchanges in Real Estate” by Professors David C. Ling and Milena Petrova)

IRS Proposes Favorable New Rules for Like-Kind Exchanges

Posted on by Trey Jackson
IRS building in Washington DC

The IRS on June 11 released proposed regulations for like-kind exchanges under section 1031 that implement changes enacted in the Tax Cuts and Jobs Act (TCJA) of 2017.  TCJA restricted section 1031 to exchanges of “real property.”  The proposed rules would provide a favorable definition of “real property” and establish a safe harbor for certain personal property received in an exchange. 

  • Like-kind exchange rules allow taxpayers to defer capital gains tax when they exchange property held for investment or business use for another property of a “like kind.”  
  • Ryan McCormick, senior vice president and counsel at The Real Estate Roundtable, described in Bloomberg  Tax (June 11) why real estate like-kind exchanges are critical in the current environment: “Like-kind exchanges are even more important during periods of economic stress, like today, when traditional financing is less reliable.”
  • TPAC Member Richard Lipton (Baker McKenzie LLP) noted favorable aspects of the proposed rules, “It’s a very broad definition and many practitioners will be happy with the inclusion of inherently permanent structures being broadly defined, and also the inclusion of certain intangible property,” Lipton said.  (Bloomberg Tax, June 11).
  • Under TCJA, items like machinery, equipment, vehicles, artwork, collectibles, and patents no longer qualify for deferral under section 1031, but exchange treatment remains available for real property, including “land and generally anything built on or attached to it.” (IRS New Release 2018-227, Nov. 19, 2018).

The proposed rules appropriately treat licenses, permits, and other rights that derive their value from real property as eligible assets.  The regulations also provide a helpful safe harbor for incidental personal property (up to 15% of the aggregate value of the replacement property) that is typically transferred, in standard commercial transactions, with the real property.  (Federal Register, June 12, Statutory Limitations on Like-Kind Exchanges)

Like-Kind Exchange Deadlines

Like-kind exchanges must meet strict deadlines to qualify for deferral.  The pandemic has greatly complicated the ability to complete an exchange.  The reasons include: stay-at-home orders, flight restrictions, an inability to visit sites or perform appraisals, the closure of local governmental offices, and a general inability to conduct the necessary due diligence. 

  • In March, The Roundtable and other real estate organizations requested an extension of 1031 deadlines.  (Coalition LKE letter, March 23)
  • The Treasury Department in early April extended the 45-day deadline for identifying like-kind exchange replacement property and the 180-day deadline to close on a like-kind exchange transaction until July 15, 2020.  (IRS Notice 2020-23)
  • “It seemed like a good-government, reasonable thing to do,” The Roundtable’s Ryan McCormick recently told The New York Times.  Real estate investors could not travel because of pandemic lockdowns and completing due diligence steps such as an appraisal became difficult, if not impossible. “Taxpayers were seeking some additional time to work through that,” McCormick told the Times.  (The New York Times, June 5)
  • An industry coalition, including The Real Estate Roundtable, on April 20 wrote to the Treasury Secretary seeking further clarification and relief on 1031 deadlines.  (Coalition letter, April 20, 2020)

The Roundtable’s TPAC will review the June 11 proposed regulations and comment on any further like-kind exchange issues that may need clarification. 

TPAC Video Discussions

TPAC held its first remote meeting in conjunction with The Roundtable’s Annual Meeting on June 12.  Wide-ranging TPAC discussions touch on recent social unrest; the COVID-19 pandemic and the CARES Act; partnership audit reform;  section 199A;  like-kind exchanges, COD income; energy-efficiency incentives; REIT related party rules; section 163(j); and much more. TPAC recordings on The Roundtable’s YouTube channel include:

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Paycheck Protection Program Changes Signed Into Law; Next COVID-19 Stimulus Legislation Expected by July

Posted on by Trey Jackson

Architect of the Capitol

Legislative changes to the Paycheck Protection Program (PPP) signed into law today will ease restrictions on forgivable loans to small businesses seeking to retain and pay workers affected by COVID-19.  (BGov, June 4)

  • H.R. 7010 passed the House (417-1) on May 28, cleared the Senate by unanimous consent on June 3 and was signed into law by President Trump today.  (Roundtable Weekly, May 22 and AP, June 5)

The bill also:   

  • Replaces the “75-25 Rule” on the use of PPP loan proceeds for loan forgiveness purposes with requirements to spend at least 60% for payroll costs and up to 40% for covered mortgage interest, rent, and utility payments;

  • Extends the PPP re-payment period to five years for small businesses that do not receive loan forgiveness;
  • Allows PPP loan recipients to take full advantage of deferral of employment taxes through the end of 2020; and
     
  • Provides borrowers a “safe harbor” from the loan forgiveness rehiring requirement if the borrower is unable to rehire an individual who was an employee of the recipient on or before February 15, 2020, or if the borrower can demonstrate an inability to hire similarly qualified employees on or before December 31, 2020;  (Congressional Research Service summary, May 28)

Senate Majority Leader Mitch McConnell (R-KY) said additional  technical fixes to the PPP will follow at the requests of Sen. Ron Johnson (R-WI), Senate Small Business and Entrepreneurship Chairman Marco Rubio (R-FL) and Sen. Susan Collins (R-ME) (RollCall, June 3)

Next COVID-19 Stimulus; Fed Expands Muni Loan Program

The Trump Administration is considering policy options for the next legislative response to the coronavirus pandemic.  The Wall Street Journal reports a senior administration official stated this week, “We’ve been through the rescue phase and we’re now in the transitional reopening phase and I think generally speaking we’d like to move into a growth-incentive phase for the future economy.”  (WSJ, June 2)

  • White House aides, according the Journal, stated the nation’s mass unrest over police brutality and racial inequality, along with the progress of business reopening efforts, will influence the pace of discussions – but they do not expect the completion of a package until July.
  • House Ways and Means Committee Chair Richard E. Neal (D-MA) on Wednesday said he is continuing negotiations with Treasury Secretary Steven Mnuchin on another round of coronavirus relief legislation that could include major infrastructure spending and tax credit proposals.  (Law360, June 4)
  • Neal said on June 3 that in addition to infrastructure investment, he intends to propose an expansion of new markets tax credits for private investment in low-income communities, low-income housing tax credits to build affordable housing, and historic rehabilitation tax credits for preservation purposes. (TNT, June 4)
  • This week also saw the Federal Reserve expand the scope of its $500 billion a lending program for state and local governments to include smaller borrowers.   (Fed news release, June 3)
  • The Fed’s expansion of its Municipal Liquidity Facility (MLF) will now enable all U.S. states “… to have at least two cities or counties eligible to directly issue notes to the MLF regardless of population.”  Governors from each state will also be able to select two bond issuers “…whose revenues are generally derived from operating government activities (such as public transit, airports, toll facilities, and utilities) to be eligible to directly use the facility.’  (MLF term sheet, June 3)
  • The MLF expansion may now allow sparsely populates states to designate two areas hard hit by the economic repercussions of the pandemic, or bond issuers like New York’s subway system, to sell debt to the Fed as a way to maintain critical services.  (New York Times, June 3)

The various policy response to economic impacts of COVID-19 will be a focus next week during The Roundtable’s Virtual Annual Meeting, which will include a discussion with Treasury Secretary Steven Mnuchin.

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Roundtable Video Alert Focuses on Tax Policy Pandemic Responses and Priorities; Industry Asks Treasury to Clarify Like-Kind Exchange Deadlines

Posted on by Trey Jackson

The Real Estate Roundtable on Tuesday released a video alert focused on tax policy efforts aimed at mitigating the COVID-19 pandemic’s economic impact on commercial real estate.  

  • Roundtable President and CEO Jeffrey DeBoer, above, introduces the video with a report on the organization’s various policy efforts related to emergency financing, including the Payroll Protection Program (PPP) and the Federal Reserve’s credit lending facilities, such as the Term Asset-Backed Securities Loan Facility (TALF) – before delving into tax policy with Roundtable Senior Vice President and Counsel Ryan McCormick.
  • McCormick describes recent actions the Treasury Department and the Internal Revenue Service have taken to provide relief and ease cash flow challenges for taxpayers, including real estate businesses and their tenants, and shares insight on remaining COVID-19-related tax priorities.
  • The discussion highlights new Treasury guidance permitting partnerships to file amended tax returns, thus allowing partnerships to benefit from retroactive provisions in the CARES Act, including the shorter depreciation period for improvements to nonresidential property.  Other issues include new guidance allowing real estate businesses to revoke prior elections under the business interest limitation.  The Roundtable had urged both actions to ensure that the tax relief in the CARES fully extends to commercial real estate and its tenants.  (Roundtable Weekly, April 10)
  • The video alert also addresses the administrative relief related to tax deadlines for like-kind exchange transactions and opportunity zone investments – along with added flexibility for mortgage servicers’ to modify loans in mortgage-backed securities (REMICs) without triggering tax liability. 
  • Remaining tax policy priorities for The Roundtable include relief that would allow private parties to restructure existing loans through debt workouts and restructurings without generating cancellation of indebtedness (COD) income – (see Roundtable COD letter, March 20) – as well as greater flexibility under the tax law for REITs to take an economic interest in a struggling commercial tenant to help avoid business closures and layoffs.”  
  • This week’s video discussion is the third of several Roundtable video reports addressing the COVID-19 economic crisis.  Other resources, including related policy comment letters, are available on the organization’s website.  (The Roundtable’s COVID-19 Resource Center).   

Like-Kind Exchange Deadline Clarification

An industry coalition, including The Real Estate Roundtable, on April 20 wrote to Treasury Secretary Steven Mnuchin seeking further clarification and relief on deadlines affecting real estate like-kind exchanges.  (LKE policy comment letter, April 20)

  • The letter requests that Treasury or the IRS clarify that recently issued IRS Notice 2020-23 did indeed initiate the 120-day extension of like-kind exchange deadlines that is part of the 2018 revenue procedure that applies to declared disasters.
  • At a minimum, Notice 2020-23 extended the 45-day deadline for identifying like-kind exchange replacement property and the 180-day deadline to close on a like-kind exchange transaction until July 15, 2020 (if the deadline otherwise would have occurred between April 1 and July 14).
  • However, relief associated with prior disasters provided 120-day deadline extensions that were retroactive to the date of the disaster declaration.  The IRS may have intended to grant the full 120-day extension, and some experts interpret the guidance as providing the longer benefit, retroactive to March 13, the date of the President’s COVID-19 disaster declaration.
  • As the letter notes, governmental restrictions and Stay at Home orders in place across the country, along with the fear of catching or spreading the life-threatening disease, threaten the ability of taxpayers to complete like-kind exchanges.
  • Identifying properties for trade purposes requires travel and a confidence in both the expected cash-flow stream and the value of potentially acquired property. Closing on an identified property requires these same conditions plus extensive due diligence by the buyer, lender and other third-party contractors, such as appraisers.  All of these necessary steps are thwarted by travel restrictions, the inability to access properties, and the closures of title/escrow companies and governmental recording offices.
  • The letter concludes, “This relief would give taxpayers who may have commenced, or who wish to commence an exchange, the necessary time to identify and / or close on a replacement property.  Taxpayers, many of whom are small to mid-sized businesses and middle class investors, should not have to be concerned about the possibility of having to pay significant capital gains taxes because like-kind exchange transactions cannot be completed due to the disruption caused by the coronavirus pandemic.”

Additional guidance from Treasury or the IRS on like-kind exchange transactions is expected in the coming days.

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IRS Grants Safe Harbors for Loan Modifications by Servicers of Mortgage-Backed Securities

Posted on by Trey Jackson

IRS Building

The IRS on April 13 issued rules that will help facilitate mortgage modifications and debt work-outs between borrowers and lenders when a loan is held in a mortgage-backed security.  The IRS guidance is consistent with the Roundtable’s request on March 20 that Treasury and the IRS take steps to protect private parties from the tax consequences of restructuring debt during the extraordinary and unanticipated COVID-19 pandemic.  

  • The new safe harbors extend to real estate mortgage investment conduits (REMICs) and investment trusts affected by loan forbearances and workouts due to the Covid-19 pandemic.  (IRS Rev Proc 2020-26)
  • REMICs are widely used vehicles for pooling mortgage loans and issuing residential and commercial mortgage-backed securities.  A REMIC is generally required to hold a substantially fixed pool of real estate mortgages and related assets and must not have the power to vary the composition of its mortgage assets. 
  • Even if an entity initially qualifies as a REMIC, one or more significant modifications of mortgages held by the entity may terminate its REMIC status.  Certain loan modifications are permitted if the change is “occasioned by default or a reasonably foreseeable default.”  A prohibited transaction by a REMIC, however, can result in a tax equal to 100 percent of the income from the transaction. 
  • The new IRS rules provide that REMICs and investment trusts can grant forbearance relief to COVID-19-affected borrowers – and REMICs can acquire mortgage loans for which such forbearance is already in place – without adverse tax consequences or threatening their tax status.  (Sidley Austin, April 15)
  • These safe harbors apply to mortgage loan forbearance that is provided voluntarily by the mortgage holder or servicer, forbearance that is State-mandated, and forbearance that is mandated in the Coronavirus Aid, Relief, and Economic Security (CARES) Act. 
  • The CARES Act generally provides temporary forbearance relief for borrowers with certain federally backed mortgage loans who are experiencing a financial hardship due directly or indirectly to the COVID-19 emergency. (JD Supra, April 16)

The rules extend to both residential and commercial mortgage loans, including federally backed mortgage, multifamily and any “non-federally backed mortgage loans,” with no explicit limits on the type of property financed. The specific safe harbors are profiled in Alston & Bird’s April 15 Advisory.

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IRS Guidance Ensures Real Estate Businesses Benefit from Phase Three Tax Relief

Posted on by Trey Jackson

IRS Building

This week, the IRS issued two revenue procedures that will help real estate businesses maximize the amount of tax relief they receive under the “Phase 3” CARES Act. The IRS actions are consistent with recent Real Estate Roundtable recommendations.

Partnership Amended Returns

  • The CARES Act included several provisions designed to generate deductions in prior years that can be “monetized” today, through the filing of amended tax returns, to help businesses stay afloat during the current economic turmoil.  As the Senate Finance Committee summary noted, “[t]hese changes will allow companies to utilize losses and amend prior year returns, which will provide critical cash flow and liquidity during the COVID-19 emergency.”  
  • In the understandable rush to enact the CARES Act, Congress did not have an opportunity to consider fully how provisions in the legislation would interact with various aspects of existing tax law and regulations.  In particular, under the partnership audit regime enacted in 2015, partnerships are no longer permitted to file amended tax returns.
  • In a letter on April 4, Roundtable President and CEO Jeffrey DeBoer urged the Treasury Department and IRS to use its regulatory authority to allow partnership to file superseding tax returns that could replace returns filed in 2018 and 2019. 
  • IRS Rev. Proc. 2020-23, released on Wednesday, allows partnerships to file amended returns for those years, effectively providing the relief The Roundtable requested.  

Business Interest Limitation

  • The Tax Cuts and Jobs Act created a new limitation on the deductibility of business interest, but allows real estate businesses to elect out, which most did in 2018.  The election is irrevocable, and the price of the election is longer cost recovery periods for real property and improvements.  The CARES Act liberalized the limitation on the deductibility of business interest for tax years 2019 and 2020.  However, the law did not allow real estate businesses to go back and change their election out of the regime.
  • In its April 4 letter, The Roundtable asked the IRS to allow real estate businesses to revoke elections made in 2018 and 2019.  This afternoon, the IRS issued the requested relief in Rev. Proc. 2020-22.

Like-Kind Exchanges

  • In addition to the actions related to the CARES Act, the IRS has provided relief to taxpayers having difficulty completing like-kind exchanges due to the COVID-19 pandemic.  In late March,  The Roundtable and 21 other national real estate organizations requested relief from the strict statutory deadlines that apply for identifying replacement property and closing on like-kind exchange transactions.  Under IRS Notice 2020-23, like-kind exchange deadlines that would otherwise fall between April 1 and July 14 are extended to July 15.

Opportunity Zones

  • Relief from the various deadlines and compliance testing dates for Opportunity Zones during the pandemic is a Roundtable priority.  IRS Notice 2020-23 provides that if a taxpayer’s 180-day period to invest gain in an opportunity fund would have expired between April 1 and July 14, 2020, the taxpayer now has until July 15, 2020 to make the investment.   

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Tax Changes Affecting CRE in Senate “Phase 3” Coronavirus Package; Roundtable Submits Request for Administration to Waive COD Income

Posted on by Trey Jackson

treasury-department-building_x475w

Senate Majority Leader Mitch McConnell (R-KY) unveiled a “Phase III” coronavirus economic stimulus proposal on March 19 that includes a number of tax provisions important to real estate – including a temporary reinstatement of the net operating loss carryback; relaxation of the current-law restrictions business interest deductions; and long-sought technical corrections to several provisions in the 2017 tax code overhaul (e.g. qualified improvement property). 

The Coronavirus Aid, Relief, and Economic Security (CARES) Act will be subject to change or additions as Democratic lawmakers and the White House with Republicans engage in urgent negotiations to produce a final bill by early next week. A number of tax provisions in the current package affecting real estate include: 

  • Temporarily increasing the threshold of deductible business interest under section 163(j) from 30% to 50% of EBITDA in 2019 and 2020.
  • Allowing a full 5-year carryback of net operating losses from 2018, 2019, and 2020 with no 80% income limitation.
  • A technical correction to the Tax Cuts and Jobs Act (TCJA) of 2017 cost recovery period for qualified improvement property.
  • A suspension of the new limitation on active losses of a pass-through business (section 461(l)) until 2021.
  • A technical correction to TCJA downward attribution of stock ownership rules.  

Other noteworthy tax provisions in the bill: 

  • Allows employers to defer payment of employer portion of Social Security tax (6.2%) in 2020, with the deferred amount payable in 2021 (50%) and 2022 (50%)
  • Provides recovery checks of up to $1,200 for individuals, $2,400 for married couples.  The rebates are increased by $500 for every child.  The rebates phase out for individuals with incomes above $75K and married couples above $150K.
  • Extends the filing date for income tax returns to July 15
  • Permits postponement of quarterly estimated tax payments due on April 15 and July 15 until October 15
  • Waives 10% early withdrawal penalty for retirement distributions up to $100K for coronavirus-related purposes. Provides favorable rules that spread out income recognition, allow for recontribution of withdrawals, and create additional flexibility for plan loans.
  • Allows non-itemizers to deduct up to $300 in charitable donations in 2020.
  • Suspends AGI limitation on charitable contributions by individuals and increases the AGI limitation on corporations to 25% in 2020.
  • Accelerates access to corporate AMT refundable credits.
  • Allows companies to recover overpayments of tax associated with TCJA one-time repatriation toll charge.

The full text of the CARES Act is available here and a lengthier summary is available here.  Additional Reference: Deloitte’s Tax News & Views March 20 summary.

Cancellation of Indebtedness (COD) Income 

The Real Estate Roundtable today asked Treasury Secretary Mnuchin and IRS Commissioner Charles Rettig to act quickly and use their broad authority to provide additional emergency tax relief that will help discourage permanent business closures, layoffs, and consumer bankruptcies.

Specifically, The Roundtable urges the Administration to waive cancellation of indebtedness (COD) income for all taxpayers for events generating COD income between March 1 and August 31, 2020.   (Roundtable COD letter, March 20)

  • Treasury has the authority to temporarily suspend COD income for one year under the statutory disaster relief tax provisions.  Waiving COD income will help facilitate private parties’ ability to engage in debt forgiveness, debt cancellation, and debt restructuring events that would not be necessary in ordinary times.
  • As the Roundtable letter explains, the action will free up much-needed financial resources that businesses can use to avoid force reductions and layoffs.  For families and individuals, waiving COD income will promote the mutual modification of obligations, including credit card debt, mortgages, student loans, and small business loans – helping them avoid bankruptcies and/or large, unwarranted tax bills.
  • The Roundtable also intends to work with Congress to ensure that it provides a permanent exemption of COD income that accrues during this extraordinary and unforeseeable public health and economic crisis.  
  • The Roundtable is also working with other real estate trade organizations to persuade Treasury to use its disaster relief authority to modify the deadlines applicable to like-kind exchange transactions.  The relief will avoid penalizing transactions delayed by the economic crisis.

As the repercussions of the corona pandemic continue to unfold, The Roundtable’s Tax Policy Advisory Committee (TPAC) continues to work on tax policies that benefit American workers, businesses and the overall economy. 

Treasury Secretary Mnuchin Addresses FIRPTA Reform at House Ways and Means Hearing

Posted on by Trey Jackson

 

Testifying before the House Ways and Means Committee on the President’s FY 2021 budget, Treasury Secretary Steven Mnuchin was questioned this week on the Foreign Investment in Real Property Tax Act (FIRPTA) and addressed potential steps he could take to encourage greater real estate investment from abroad.  (Watch 2:35 video of March 3 exchange with Mnuchin)

  • During the hearing’s Q&A with Secretary Mnuchin, committee member Kenny Marchant (R-TX) noted a recent letter that he and other GOP taxwriters sent to the Treasury Department urging a reevaluation of FIRPTA and related IRS guidance (Notice 2007-55).  
  • The congressional letter, led by Ways and Means Republican Devin Nunes (R-CA), encourages Treasury to withdraw section two of the IRS Notice, which effectively imposes U.S. capital gains tax on the liquidating distributions of domestically controlled real estate investment trusts (REITs).   Often, when a foreign investor is a minority partner in a U.S. real estate or infrastructure investment, the joint venture employs a domestically controlled REIT structure.
  • The 16 signatories of the February 20 letter wrote, “repealing the IRS Notice will restore the intent of Congress with respect to the tax law governing liquidations, provide parity to investors, and increase direct foreign investment in U.S. commercial real estate and infrastructure in every corner of the nation.”
  • During the hearing, Rep. Marchant called attention to the letter – and noted the IRS guidance applies FIRPTA to previously untaxed transactions involving domestically controlled REITs.  
  • Mnuchin responded that the Feb. 20 letter prompted a briefing at Treasury this week – and that he shares the concerns the letter  raises about FIRPTA.  “[I]t makes no sense that we discriminate against foreign investors,” Mnuchin said.  “But in my mind, anything we can do legally to encourage those investments we will do.  So thank you for the letter.  We are reviewing it.  It is at the top of my list,” he added. (Watch 2:35 video of Marchant and Mnuchin)
  • During another Ways and Means tax hearing last month, Rep. Marchant said, “FIRPTA is an outdated, discriminatory law.  It applies to no asset class other than real estate and infrastructure … Economic studies indicate repealing FIRPTA could drive $65 to $125 billion in new investment.”  (Watch video of Feb. 11 FIRPTA exchange).  Rep. Marchant is lead sponsor of the bipartisan Invest in America Act (H.R. 2210), a bill that would repeal the entire FIRPTA law. 
  • A similar letter was sent on December 18, 2019 to Secretary Mnuchin by a bipartisan group of 11 Senate Finance Committee Members led by Sen. Robert Menendez (D-NJ) – a longtime lead sponsor of FIRPTA repeal bills.  Another bipartisan letter to Secretary Mnuchin urging repeal of the IRS Notice was signed by 32 Representatives of the House Ways and Means shortly before introduction of the Tax Cuts and Jobs Act of 2017 (TCJA). (Roundtable Weekly, Dec. 20, 2019)

Members of the Roundtable’s Tax Policy Advisory Committee (TPAC) have met with Treasury officials on multiple occasions to discuss the harm caused by IRS Notice 2007-55.  Leading industry experts also convened on Oct. 30 at the National Press Club in Washington for an in-depth discussion the economic damage incurred by the IRS Notice.  An industry coalition is scheduled to meet with officials in Treasury’s Office of Tax Policy next week to discuss the issue.

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