Tag: Tax Policy

House Ways & Means Republicans Ask Treasury Secretary Mnuchin to Boost Investment, Create Jobs by Easing FIRPTA Tax Burden

Posted on by Trey Jackson

Treasury Department

Over three-quarters of the Republican Members of the House Ways and Means Committee on Feb. 20 urged Treasury Secretary Steven Mnuchin to remove tax barriers to foreign investment in U.S. real estate and infrastructure.  

  • The congressional letter, led by Representative Devin Nunes (R-CA), encourages Treasury to withdraw section two of IRS Notice 2007-55.  The Notice, which relates to the Foreign Investment in Real Property Tax Act (FIRPTA), effectively imposes U.S. capital gains tax on the liquidating distributions of a domestically controlled REIT. 
  • Domestically controlled REITs commonly are employed in joint ventures where a foreign investor is a minority partner in a U.S. real estate or infrastructure investment.  Prior to the Notice, a liquidating distribution from a domestically controlled REIT was treated as nontaxable sale of stock for tax purposes. 
  • The 16 signatories of the February 20 letter wrote that “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.”
  • The Ways and Means Republican letter comes on the heels of a high-profile exchange on the broader economic harm caused by FIRPTA at a recent Ways and Means tax hearing.  At the hearing, Rep. Kenny Marchant (R-TX), said that “FIRPTA is an outdated, discriminatory law.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.” Rep. Marchant is lead sponsor of the bipartisan Invest in America Act (H.R. 2210), a bill to repeal FIRPTA altogether.  (Watch video of Feb. 11 FIRPTA exchange)
  • In conjunction with The Roundtable’s Tax Policy Advisory Committee (TPAC) meeting on January 29, Darin Mellott, Director of Americas Research at CBRE shared updated data indicating that foreign capital represented only 10 percent of total transaction volume between 2007 and 2019 – further evidence that FIRPTA weighs heavily on potential inbound investment.  In other asset classes, such as manufacturing, foreign capital represents a much larger share of overall investment. 
  • A letter similar to the House Republican letter was sent by a bipartisan group of 11 Senate Finance Committee Members to Secretary Mnuchin on December 18, 2019.  The December letter was led by Sen. Robert Menendez (D-NJ), a longtime lead sponsor of bills to roll back FIRPTA, and Sen. Johnny Isakson (R-GA).  A bipartisan House Ways and Means Committee letter urging repeal of the Notice and signed by 32 Representatives was sent to Secretary Mnuchin 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 have met with Treasury officials on multiple occasions to discuss the harm caused by IRS Notice 2007-55.  Since 2017, Treasury’s regulatory agenda has focused on implementing the TCJA.  With TCJA implementation nearly complete, The Roundtable is now urging Treasury officials to give the Notice the attention it merits.

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White House Releases FY 2021 Budget; Congressional Hearings Focus on Administration Policy Priorities, Including FIRPTA Repeal

Posted on by Trey Jackson

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The Trump Administration on Monday released a $4.8 trillion budget for FY 2021 signaling policy priorities for a potential second term, followed by Senate and House committee hearings this week that focused on the proposal and tax-related issues – including FIRPTA repeal; correcting a drafting error affecting qualified improvement property (QIP); and expansion of the low-income housing tax credit.  (Administration’s 2021 budget proposal and supporting budget materials)

  • Initial budget proposals from the White House are useful only as a starting point for funding negotiations with Congress, which can produce a significantly different budget reflecting vastly different policy positions. 
  • The Administration’s FY 2021 budget proposal would also reverse a two-year deal negotiated with Congress last summer.  While the August deal raised spending limits for both defense and domestic programs, this week’s proposed budget would cut domestic spending by six percent. (The Hill, Feb. 9)
  • The proposed budget also includes the elimination of several energy tax incentives of importance to real estate, including:

* Repeal credit for residential energy efficient property placed in service after December 31, 2020.

* Repeal accelerated depreciation for renewable energy property —including solar energy, wind energy, biomass, geothermal, combined heat and power, and geothermal heat pump property; fuel cells; and micro-turbines—would range from five to 20 years. Qualifying properties would still be eligible for the bonus depreciation allowance included in the 2017 tax overhaul.

* Repeal energy investment credit for property where construction begins after December 31, 2020.

  • The White House budget, which would also devote billions to construct a border wall with Mexico and lead to a $966 billion deficit, was immediately rejected by House Speaker Nancy Pelosi (D-CA) and criticized by House Budget Committee Chairman John Yarmuth (D-KY). (Associated Press, Feb. 9)

  • Republican Senate Budget Chairman Mike Enzi (WY) also weighed in with a Feb. 10 statement.  “Presidents’ budgets are a reflection of Administration priorities, but in the end, they are just a list of suggestions, as the power of the purse rests with Congress. Bipartisan consensus will be necessary to bring our debt and deficits under control. I hope to work with my colleagues on both sides of the aisle to put our country on a more sustainable fiscal course.”

Congressional Hearings

Administration officials appeared before congressional committees this week to testify about the budget proposal and face Q&A on other policy issues.

  • Secretary of the Treasury Steven Mnuchin testified on Feb. 12 before the Senate Finance Committee, urging Congress to make the temporary provisions of the 2017 tax law permanent.

  • During Q&A, Mnuchin also expressed interest in working with Sen. Maria Cantwell (D-WA) and Senate Banking, Housing and Urban Affairs Ranking Member Sherrod Brown (D-OH) on expanding the Low Income Housing Tax Credit (LIHTC).
  • The Treasury Secretary reiterated his support for Sen. Pat Toomey’s (R-PA) bill to correct a drafting error in the 2017 tax law that unintentionally requires retailers to depreciate certain property improvements over 39 years – rather than the intended option of immediate expensing.  Correcting this qualified improvement provision (QIP) is, Mnuchin testified, “our number one request to get a congressional fix for.”  (Senate Finance Committee hearings, with video)
  • In the House, the Ways and Means Committee on Feb. 11 held a hearing on “The Disappearing Corporate Income Tax, which was preceeded by a Joint Committee on Taxation report on corporate income tax policy.
  • During Q&A, Committeee Member Kenny Marchant (R-TX), sponsor of the Invest in America Act (H.R. 2210, engaged witnesses on the importance of repealing the Foreign Investment in Real Property Tax Act of 1980 (FIRPTA).
  • Jason Furman – an economics professor at the Harvard Kennedy School of Government and former chair of the White House Council of Economic Advisers – responded to Rep. Marchant, “I think it is certainly worth taking a serious look at repealing it … In the Obama Administration we did take a look at this and it did seem like there was some infrastructure investment that wasn’t coming in to the country as a result of it.”
  • Douglas Holtz-Eakin – a former director of the Congressional Budget Office and the sole Republican witness – told the committee, “This is a law whose time has passed.  It should be repealed.”  ( Watch video of Rep. Marchant’s FIRPTA exchange)

More congressional hearings on the budget and appropriations are scheduled after lawmakers return from next week’s congressional recess.

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House Ways and Means Committee Signals Green Energy Tax Bill; Trump Administration Developing “Tax 2.0” Proposal

Posted on by Trey Jackson

House Ways and Means Committee Chairman Richard Neal (D-MA) recently confirmed plans to advance legislation in 2020 that would expand and create new renewable energy and energy-efficiency tax incentives.  “We talked about (the markup) this morning,” Neal told reporters on Jan. 14. He added, “We are scheduling events.” (BGov, Jan. 15 and Jan. 24) 

  • The starting point for green energy tax legislation in the Ways and Means Committee is likely a draft bill unveiled last November by Rep. Mike Thompson (D-CA), who chairs the Subcommittee on Select Revenue Measures. 
  • Rep. Thompson’s discussion draft of the Growing Renewable Energy and Efficiency Now (GREEN) Act would modify the enhanced deduction for energy-efficient commercial building property (section 179D);create an expanded tax credit for the developers of new, energy-efficient home (section 45L); and modify the tax credit for energy-efficient improvements to existing homes (section 25C).  (Roundtable Weekly, Nov. 22) (Rep. Thompson news release with link to the GREEN tax draft legislation, Nov. 19) 
  • The Real Estate Roundtable and other real estate and environmental organizations are encouraging Members of Congress to consider an additional proposal that would incentivize existing buildings to purchase and install energy-efficient upgrades that reduce greenhouse emissions, generate taxpayer savings, and spur innovation and investment.    
  • Specifically, draft legislation under review would create a new category of energy-efficient qualified improvement property (E-QUIP) that is subject to an accelerated 10-year depreciation period.  The E-QUIP benefit would apply to purchases of modern and energy-efficient HVAC, lighting, and building envelope improvements, such as energy-saving roofs and windows. (Roundtable Weekly, May 10)

Separately, President Trump on Jan. 22 said a substantial middle-class tax cut – referred to as “Tax Cut 2.0” – will be released within 90 days, during an interview with Fox Business’ Maria Bartiromo at the World Economic Forum in Davis, Switzerland.  (Reuters, Jan. 22)

  • Treasury Secretary Steven Mnuchin told CNBC at the same conference, “The president has asked us to start working on what we call ‘tax 2.0,’ and that will be additional tax cuts. They’ll be tax cuts for the middle class, and we’ll also be looking at other incentives to stimulate economic growth.”  (CNBC, Jan. 23)
  • Larry Kudlow, director of the White House National Economic Council, told FOX Business’ Liz Claman on Jan. 17 that “The president directed me to produce what we’re calling ‘tax cuts 2.0.’  It will be published sometime during the campaign, has a message for future Trump economic growth policies, particular emphasis on the middle class in his second term.”
  • A legislative path toward passage of individual tax bills in an election year is very narrow, but separate tax proposals by Congress and the White House could culminate in an end-of year compromise package. 

Tax issues for 2020 will be a focus at next week’s Roundtable State of the Industry Meeting in Washington – both during the Jan. 28 business meeting and the Jan. 29 Tax Policy Advisory Committee (TPAC) meeting.  

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Seven-Year TRIA Reauthorization Passed as Part of $1.4 Trillion Spending Bill

Posted on by Trey Jackson

A seven-year reauthorization of the Terrorism Risk Insurance Act (TRIA) was approved this week by the House and Senate as part of a year-end funding bill (H.R. 1865).  The provision reauthorizes TRIA through 2027, a year ahead of its slated sunset date of Dec. 31, 2020. (TRIA provisions on pages 1233–1236 of the year-end funding legislation). 

The measure is part of a massive $1.4 trillion congressional spending deal to fund the government until the end of the fiscal year – Sept. 20, 2020.  President Trump is expected to sign two separate funding bills to keep the government open past midnight tonight. 

Roundtable Chair Debra Cafaro (Ventas, Inc.) stated, “The Real Estate Roundtable is pleased that TRIA will be extended until 2027.  This federal terrorism insurance backstop was enacted following 9-11 and has been extended and reformed several times since. We cannot overstate the valuable safety and liquidity that the program brings to the US economy, businesses of all manner and commercial real estate markets.”

A long-term, “clean” reauthorization of TRIA, well in advance of its expiration, has been a top policy goal of The Roundtable.  This was achieved a full year ahead of schedule.  (Roundtable background on TRIA)

In addition to TRIA, the omnibus appropriations bill (H.R. 1865) contains several other positive measures affecting real estate.  The tax and funding extensions include: 

  • The EB-5 Regional Center Program, which provides visas to foreign nationals who pool their investments in regional centers to finance U.S. economic development projects.  The program would be extended until Sept. 2020.  Department of Homeland Security (DHS) regulations that took effect in November presently govern key elements of the EB-5 program regarding investment levels and Targeted Employment Area (TEA) definitions.   
  • The National Flood Insurance Program.  Without the extension, the program’s borrowing authority would have been reduced from $30.4 billion to $1 billion. The program would also be extended until Sept. 2020.   (BGov and CQ, Dec. 20)
  • Tax measures would be extended through the end of 2020.  They include (1) the section 179D tax deduction for energy efficient commercial building property; (2) the section 25C tax credit for energy efficient improvements to principal residences; (3) the section 45L tax credit for construction of new energy efficient homes; (4) the tax exclusion for home mortgage debt forgiveness; (5) the tax deduction for mortgage insurance premiums; and (6) the New Markets Tax Credit;
  • The Brand USA program would be extended through fiscal year 2027.  Brand USA promotes travel to the U.S. through a public-private partnership that is funded through private-sector donations and funds collected from foreign visitors to the U.S.

This week also saw the House pass legislation (H.R. 5377) that would temporarily raise and then eliminate for two years the $10,000 cap on state and local tax (SALT) deductions, which would be paid for by permanently raising the top individual tax rate to 39.6%.  This “messaging” bill is unlikely to be taken up in the GOP-controlled Senate and President Trump has also threatened to veto it.

After a flurry of year-end policymaking amid impeachment proceedings, both chambers of Congress recessed today and will return in early January.

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Year-End Tax Package Uncertain; House Ways & Means Votes to Suspend Cap on State and Local Tax Deduction

Posted on by Trey Jackson

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[Above: Members of the House Ways and Means Committee, including Chairman Richie Neal (D-MA), top center, and Ranking Member Kevin Brady (R-TX), top right.]

Prospects for a year-end tax bill are uncertain as congressional leadership and the Trump Administration expect to reveal details of a nearly $1.4 trillion FY2020 spending deal next week.  Meanwhile, the House Ways and Means Committee on Dec. 11 approved a temporary suspension of the $10,000 deduction cap on state and local taxes (SALT) enacted in the 2017 tax reform bill.

  • The Restoring Fairness for States and Localities Act (H.R. 5377) passed Ways and Means on a mostly party line vote of 24-17. The bill would raise the SALT deduction cap from $10,000 to $20,000 for married couples in 2019 and repeal the limit entirely for 2020 and 2021.
  • The measure’s costs would be offset by an increase in the top individual tax rate from 37 percent to its pre-2017 tax law level of 39.6 percent through 2025, when tax provisions in the 2017 tax overhaul are set to expire.  (The Hill, Dec. 11)
  • A description of the proposed changes to the SALT cap and top rate bracket are available from the Joint Committee on Taxation.
  • H.R. 5377 is expected to pass the House if it gets a vote next week on the House floor. The House Rules Committee has announced a hearing on the bill for December 16. However, the GOP-led Senate is unlikely to consider the legislation.  (BGov, Dec. 11)
  • If any tax measures are to be enacted this year, they would likely have to ride on an “omnibus” spending bill, which may be broken into two packages for votes next week before Congress is scheduled to recess on Dec. 20.
  • Disagreements between House Democratic and Senate Republican tax-writers over what measures should have priority, combined with the large number of tax items competing for consideration, are complicating prospects for agreement. 
  • Senate Majority Whip and Finance Committee member John Thune (R-SD) on Dec. 12 said, “At the moment, nothing’s happening.”  (Deloitte Tax News & Views, Dec. 13)
  • Senate Finance Committee member Sherrod Brown, (D-OH) commented to reporters Dec.12 about what tax measures are under negotiation.  “It’s still all over the place,” Brown said.  Committee member Sen. Rob Portman (R-OH) stated, “I’m frustrated because I don’t think we have an agreement yet on anything.”  (Tax Notes, Dec. 13)

A summary of the expired and expiring tax deductions, credits, and incentives that would be renewed through 2020 under the Taxpayer Certainty and Disaster Relief Act (H.R. 3301), which the House Ways and Means Committee approved on June 20, is available from Deloitte Tax LLP.

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IRS Delays and Modifies Several New Partnership Tax Reporting Requirements

Posted on by Trey Jackson

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Responding to concerns raised by The Real Estate Roundtable and others, the Internal Revenue Service (IRS) on Dec. 9 issued Notice 2019-66 modifying and postponing several proposed changes to partnership tax reporting requirements.  (Bloomberg Tax, Dec. 9)

The Real Estate Roundtable on Nov. 18 sent a letter to Treasury and the IRS urging the government to postpone certain reporting requirements in the new partnership tax return forms for 2019.  The letter encouraged the IRS to seek formal input from stakeholders regarding specific items.  The Roundtable noted in the letter that the reporting requirements as originally proposed were generating significant taxpayer uncertainty; could lead taxpayers to adopt inconsistent approaches to computing information; and may result in more harm than good.  (Roundtable letter, Nov. 18)

Twelve other national real estate organizations sent a joint letter on Nov. 22 seeking a delay in the requirements and requesting a comprehensive comment process

This week’s IRS Notice makes the following changes:

  • The requirement to report partners’ shares of partnership capital on the tax basis method is delayed until 2020 (for 2019, capital accounts will be reported consistent with the reporting requirements in 2018);
  • The requirement for partnerships to report to partners information about separate “Section 465 at-risk activities” is delayed until 2020;
  • The Notice clarifies the requirement for partnerships and other persons to report a partner’s share of “net unrecognized Section 704(c) gain or loss” by defining this term for purposes of the reporting requirement.
  • It exempts publicly traded partnerships from the requirement to report their partners’ shares of net unrecognized Section 704(c) gain or loss; and
  • It also provides relief from certain reporting penalties imposed under the tax code for taxpayer who follow the Notice.  These penalties include the failure to furnish correct payee statements; the failure to file a partnership return that shows required information; and the failure to furnish information required on a Schedule K-1.

Significant changes were made to the partnership audit rules in 2015, in response to widespread government concerns related to the challenges of administering partnership tax rules. The Roundtable and members of its Tax Policy Advisory Committee (TPAC) have actively contributed to the development and modification of partnership audit reform legislation.  (Roundtable Weekly, Jan. 5, 2018 and October 11, 2019)

TPAC will continue to engage IRS and Treasury officials about timely stakeholder concerns with regulatory issues affecting real estate and the economy.

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Tax Measures and TRIA Among Year-End Policy Rush

Posted on by Trey Jackson

Capitol Hill
Congress faces a Dec. 20 deadline to fund the government or risk a shutdown as the impeachment process continues in the House, with a likely trial in the Senate beginning in January.

  • Funding for the National Flood Insurance and EB-5 investor programs are currently operating under a four-week spending bill signed by President Trump on Nov. 21.  Without a spending bill or a “Continuing Resolution” (CR) extending current funding, the programs will shutdown on Dec. 21 until Congress reaches a resolution. (Roundtable Weekly, Nov. 22)
  • Several legislative measures – including an end-of-year tax policy bill and reauthorization of the Terrorism Risk Insurance Act (TRIA) – may compete for inclusion in a must-pass “omnibus” spending package. Yet lawmakers may not have enough time to complete fiscal 2020 appropriations before current funding runs out in two weeks.  Another CR is a possibility before Congress breaks for the holiday.
  • The contentious issue of appropriating Department of Homeland Security (DHS) funds for a wall on the border with Mexico remains a sticking point in negotiations. This same issue led to a historic, 35-day government shutdown from Dec. 22, 2018 to Jan. 25, 2019.
  • This year, the Trump Administration has requested $8.6 billion for Fiscal Year 2020 to build the wall – and an additional $3.6 billion to restore military base funding that was previously transferred toward partial wall construction.  An administration official said President Trump will not sign any nondefense bill until funding for DHS and a border wall are resolved.  (CQ, Dec. 4)
  • Among the legislative measures of importance to commercial real estate that may be included in a year-end omnibus are tax extenders and technical corrections.
  • Negotiations on a tax package and extenders have been difficult, according to Senate Finance Chairman Chuck Grassley (R-IA). “It’s different this year from other years,” he said. (Politico, Dec. 5)
  • House Ways and Means Committee Chairman Richie Neal (D-MA) said yesterday that some technical corrections to the 2017 tax overhaul law could become part of a year-end tax bill.  “I’m interested in some technical corrections,” Neal said, adding that they could include a fix to an error that prevents restaurants and retailers from immediately expensing the cost of interior renovations.  (BGov Tax, Dec. 5)
  • A top legislative priority for CRE that is also outstanding is a seven-year TRIA reauthorization, which passed the House on Nov. 18 (H.R. 4634) as the Senate Banking Committee advanced a similar bill (S. 2877) on Nov. 20.  (Roundtable Weekly, Nov. 22)
  • The Real Estate Roundtable is working with its partners in the Coalition to Insure Against Terrorism (CIAT) to urge Senators to include the TRIA reauthorization in a possible year-end spending package.  CIAT sent a letter this week to all Senators urging them to co-sponsor S. 2877 and secure its passage before the end of 2019. (CIAT Letter, Dec. 2)
  • The Roundtable and its CIAT partners continue to meet with Senate offices to encourage increased support for S. 2877. Sen. Thom Tillis (R-NC) is the lead sponsor, with 17 bipartisan cosponsors.
  • As Congress attempts to juggle many legislative priorities – including an updated version of a trade agreement with Mexico and Canada (USMCA) and a bill on prescription drug costs – the pressure to pass multiple appropriations bills funding government agencies may lead to a Continuing Resolution extending current funding.

House Majority Leader Steny Hoyer (D-MD) told reporters this week, “I don’t want to contemplate having bills pushed over [into 2020] because we can’t get agreement.”  (CQ, Dec. 4)

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Roundtable Submits Comments to House Climate Crisis Committee; House Democrats Unveil Green Energy Tax Draft

Posted on by Trey Jackson

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The Roundtable submitted energy and climate policy recommendations to the House Select Committee on the Climate Crisis on Thursday, while members of the House Ways and Means Committee unveiled a draft legislative package of more than 20 energy tax incentives – including incentives to promote commercial and residential building energy efficiency.  

The Roundtable’s climate letter submitted Nov. 21 responds to a request for information from the Select Committee. This panel has no authority to write legislation but is authorized to study climate change and issue legislative policy recommendations (expected by March 31, 2020).

In its study and review of climate policy recommendations, the Select Committee has held a series of hearings featuring various stakeholders – including one focused on “Cleaner, Stronger Buildings.”  (Roundtable Weekly, October 25, 2019) .

The Roundtable’s comments to the Select Committee highlighted the priorities advocated by its Sustainability Policy Advisory Committee (SPAC) to:       

  • Improve the model building energy codes process by enacting the Portman-Shaheen Energy Savings and Industrial Competitiveness (ESIC) Act. (Roundtable Weekly, September 27, 2019)
     
  • Enhance EPA’s voluntary ENERGY STAR incentive programs for both commercial buildings and tenants.
  • Improve the quality and reliability of the national data collected by the federal Commercial Building Energy Consumption Survey.
  • Create meaningful accelerated depreciation periods to encourage investments in high performance equipment to retrofit existing commercial and multifamily buildings. (Roundtable Weekly, May 10, 2019)
  • Foster public-private partnerships to finance safety and resiliency improvements to the electricity grid, the natural gas pipeline network, and other energy infrastructure assets.

Meanwhile, a discussion draft of the Growing Renewable Energy and Efficiency Now (GREEN) Act was released Nov. 19 by the chairman of the House Ways and Means Subcommittee on Select Revenue Measures – Rep. Mike Thompson (D-CA). 

The GREEN Act would extend and revise a number of expired tax incentives, including provisions aimed at encouraging taxpayers to improve the energy efficiency of homes and commercial buildings. Specifically, the discussion draft includes:

  • An updated and enhanced deduction for capital expenditures on energy-efficient commercial building property (section 179D)
  • An expanded tax credit for the developers of new, energy-efficient homes (section 45L)
  • A modified tax credit for energy-efficient improvements to existing homes (section 25C)

Under the bill, the revised tax incentives would be available through 2024. Following release of the draft legislation, House Ways and Means Committee Chairman Richie Neal (D-MA) stated, “The climate crisis requires bold action, and I’m pleased that we’re using the legislative tools at Ways and Means’ disposal to create green jobs, reduce carbon emissions, and help heal our planet.” We look forward to hearing from stakeholders to ensure this bill is effective in helping improve energy efficiency and eliminating carbon emissions.”

Prospects for passing the GREEN Act are unclear as it is a Democratic initiative that currently lacks Republican support. 

Additionally, The Roundtable and coalition partners continue to lay the research and data foundation for a new tax incentive that would provide accelerated depreciation for high performance, HVAC, lighting, windows, and other equipment to retrofit existing commercial and multifamily buildings, known as “E-QUIP.” (See Roundtable Weekly, May 10, 2019).  The coalition’s objective is for bipartisan introduction of an E-QUIP bill in early 2020.

The Roundtable’s Tax Policy Advisory Committee (TPAC) plans to analyze the proposed measures and respond to any eventual energy tax legislation that may be introduced in the New Year.

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Treasury Issues Final Regulations Modifying Rules for Allocating Real Estate Debt Among Partners

Posted on by Trey Jackson

Final regulations released by the Treasury Department last Friday and effective October 9 provide new tax guidance on the allocation of liabilities between partners in a real estate partnership.  The new rules bring to a conclusion a regulatory project that started over six years ago.

  • How real estate debt and other liabilities are allocated among partners when property is contributed to a partnership carry important tax consequences.  Allocation rules can determine whether built-in gain is recognized or deferred at the time of the contribution.  The rules also affect whether a partner obtains sufficient tax basis to deduct future losses.  Generally, a partner receives full basis for partnership debt if the debt is recourse and the partner is obligated to pay off the loan in the event the partnership defaults.
  • The new regulations will likely complicate taxpayers’ ability to achieve a preferred allocation of real estate liabilities (and deductions) through the use of liability guarantees such as “bottom guarantees,” capital account deficit restoration obligations, and other payment or reimbursement arrangements. 
  • A bottom guarantee is a guarantee of the last dollars of a liability.  The lender may pursue the guarantor only if the lender is unable to collect at least the guaranteed amount of the loan from the borrower.  The final rules will largely restrict the use of bottom guarantees.  Treasury expressed concerns that bottom guarantees lack a non-tax commercial purpose, are “structured to insulate the obligor from having to pay,” and do not represent a real economic risk of loss.
  • On four separate occasions, The Roundtable submitted comments on the partnership liability regulatory project, which began in 2013. Additionally, a working group from The Roundtable’s Tax Policy Advisory Committee (TPAC) previously met with Treasury and IRS officials.  The Roundtable had concerns that changes would disrupt longstanding partnership tax rules and increase the tax liability of previously untaxed real estate reorganization transactions.  [Roundtable Comment Letters: March 13, 2013 and April 7, 2017  and August 7, 2017 ] 
  • Input from The Roundtable, TPAC members and other stakeholders contributed to several revisions to the proposed rules over the last five years.  The rules published in the Federal Register on October 9 finalize temporary regulations under section 752 that were released in 2016 and scheduled to expire this month.  Those 2016 regulations were revised versions of the rules initially proposed in 2014.  The October 9 rules also finalize proposed regulations issued in June 2018 that walked back 2016 proposed regulations with respect to the allocation of debt in “disguised sales” transactions under section 707. 
  • The preamble to the final rules notes that Treasury continues to consider the appropriate treatment of “exculpatory liabilities” that are recourse to an entity under state law, but where no partner bears the economic risk of loss.

The final regulations provide critical transition relief.  The rules generally apply to liabilities incurred or assumed by a partnership, and to payment obligations imposed or undertaken with respect to a partnership liability, on or after October 9, 2019.  The new restrictions do not apply if the liability was incurred or assumed by a partnership, or the payment obligation was imposed or undertaken, pursuant to a written binding contract in effect prior to October 9.

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Senate Finance Committee Ranking Member Introduces Bill to Tax Carried Interest at Ordinary Income Rates

Posted on by Trey Jackson

Senate Finance Committee Ranking Member Ron Wyden (D-OR) yesterday introduced legislation to fundamentally alter the longstanding tax treatment of a profits interest in a real estate partnership. 

Senate Finance Committee Ranking Member Ron Wyden (D-OR) has introduced legislation to fundamentally alter the longstanding tax treatment of a profits interest in a real estate partnership.

  • The Wyden proposal (detailed summary of the legislation and one-pager) would depart dramatically from prior carried interest legislation by taxing partners before any capital gain or even rental income is generated by the partnership.  For example, it would give rise to large amounts of taxable (but phantom) income for a general partner with a profits interest during the pre-construction and development phase of a real estate project.
  • The legislation would treat a profits interest in a real estate partnership as an interest-free loan from the other partners. The bill would effectively tax the partner with a profits interest annually, at ordinary income rates, on his or her deemed share of the invested capital by multiplying the deemed share by a specified interest rate (9% plus the variable yield on a corporate bond index that is currently 2.93%).  The product would be considered taxable, ordinary income.
  • In addition to taxing partners currently on non-existent, illusory income, in many cases the legislation would not allow partners to recover the taxes down the road if the project ultimately fails to produce a capital gain.  That’s because the losses would be treated as capital losses that generally are nondeductible against ordinary income. 
  • General partners are currently taxed at ordinary income rates on their management fees and other income that is compensatory in nature.  Partners owe tax on any guaranteed payments for services provided.  Under the Wyden bill, however, a real estate entrepreneur would be taxed today on a partnership’s invested capital-capital at risk-irrespective of whether the project will ever generate income.  

  • The  Real Estate Roundtable opposes both Senate and House carried interest proposals. General partners earning a carried interest in a real estate partnership bear significant risks beyond direct capital contributions. These risks can include funding predevelopment costs, guaranteeing construction budgets and financing, and exposure to potential litigation over countless possibilities. 

  • Senator Wyden’s bill came just days after a televised interview in which President Trump indicated he still intends to address the carried interest issue.  (FOXBusiness, May 20).  “If President Trump wants to address carried interest and make the tax code more fair, he’ll be happy to support my new proposal,” said Sen. Wyden. (Wyden news release, May 23) 
  • Other legislative proposals to reform the taxation of carried interest were introduced in March by Sen. Tammy Baldwin (D-WI) and House Ways and Means Committee member Bill Pascrell, Jr. (D-NJ).  (News releases: Baldwin and Pascrell)
  • The Roundtable and 13 other national real estate organizations sent a letter to members of the House Ways and Means Committee on March 26 about the adverse impact that the Baldwin-Pascrell legislation (H.R. 1735) would have on U.S. real estate and entrepreneurial risk taking.  (Roundtable Weekly, March 29)  
  • The letter notes how the bill would result in a huge tax increase on Americans who use partnerships in businesses of all types and sizes – and would be particularly harmful to the nearly 8 million partners in U.S. real estate partnerships.  
  • The March 26 letter states, “The false narrative surrounding the carried interest issue is that it targets only a handful of hedge fund billionaires and Wall Street executives.  The carried interest legislation is far broader and would apply to real estate partnerships of all sizes-from two friends owning and leasing a townhome to a large private real estate fund with institutional investors.” 

The Real Estate Roundtable opposes both Senate and House carried interest proposals.  General partners earning a carried interest in a real estate partnership bear significant risks beyond direct capital contributions. These risks can include funding predevelopment costs, guaranteeing construction budgets and financing, and exposure to potential litigation over countless possibilities.