Democrats are planning to work with Senators Joe Manchin (D-WV), left, and Kyrsten Sinema (D-AZ), right, this spring to resuscitate parts of the moribund Build Back Better (BBB) Act, in hopes that a scaled-back domestic policy package can pass the 50-50 Senate under the budget reconciliation process. (Business Insider, April 13) 

The Manchin View 

• Manchin and Sinema remain key votes in the Senate after their reluctance to approve the Biden Administration’s BBB social and climate policy package last year. (Roundtable Weekly, Jan. 21)
  
  
• Manchin, chair of the Senate Energy and Natural Resources Committee, has signaled his support for a much smaller package that would include climate programs, prescription drug reform, and reversal of Trump-era tax cuts that would generate savings for deficit reduction. (Politico, April 4)
  
  
• Manchin also issued a statement on April 12 about consumer inflation rising to 8.5%, the largest 12 month increase in four decades. “Getting inflation under control will require more aggressive action by a Federal Reserve that waited too long to act. It demands the Administration and Congress, Democrats and Republicans alike, support an all-the-above energy policy because that is the only way to bring down the high price of gas and energy while attacking climate change,” Manchin said.
  
  
• Additionally, he commented this week about the possibility of revised BBB negotiations, "We'll just see if there's a pathway forward. We don't know if there's a pathway forward yet.” (Business Insider, April 13) 

Sinema & Taxes 

• Sinema offered her views this week, commenting, "What I can't tell you is if negotiations will start again or what they'll look like. But what I can promise you is that I'll be the same person in negotiations if they start again that I was in negotiations last year." (Arizona Republic, April 13)
  
  
• She added, “I am unwilling to support any tax policies that would put a break on  economic growth or stall personal or economic growth for America’s industries.” (Arizona Republic, April 13)
  
  
• Sinema noted last week that she wants to ensure any spending package is "responsibly offset and that new revenue provisions protect qualified small business income where possible." (NFIB Tax Summit, April 7)
  
  
• Senate Minority Leader Mitch McConnell (R-KY) this week stated, “Sinema is unenthusiastic about tax hikes. Hopefully that will be enough to keep [BBB-related legislation] underwater permanently." (Business Insider, April 12)
  
  
• Sen. Tim Kaine (D-VA) noted Congress is on a tight deadline to pass a reconciliation package after they return from recess on April 25. "You either do it before Memorial Day or you're not going to do it,” Kaine said. (Politico, April 4)

Sen. Sinema will be a guest at The Roundtable’s April 25-26 Spring Meeting in Washington, DC. (Roundtable-level members only)

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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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• President Biden’s budget includes tax proposals recycled from last year that failed to pass congressional  negotiations, including taxing long-term capital gains at ordinary income rates – and taxing carried interest in real estate partnerships as ordinary income. (Roundtable Weekly, April 1) 

• In Bisnow’s “Taxing Carried Interest as Ordinary Income: The Idea that Never Dies, but Never Becomes Law Either,” DeBoer noted, “The president’s carried interest budget proposal would, for the first time, limit capital gain tax treatment to the return on cash and cash-equivalent investment. This would ignore the reality that real estate owners and developers bear significant financial risks beyond their capital contribution."
• DeBoer added, "The capital gains tax incentive has always recognized and rewarded other factors beyond just invested cash, including the assumption of construction, litigation and market risk, as well as the sweat equity associated with owning investment real estate."
• Targeting tax evaders and illegal transactions is appropriate, DeBoer noted, but he emphasized that penalizing entrepreneurship and discouraging noncash risk-taking by recharacterizing all carried interest as ordinary income would be a mistake.
• Proposals to recharacterize carried interest as ordinary income have been introduced in Congress perennially since 2007. The Tax Cuts and Jobs Act of 2017 included a provision extending the holding period requirement from one to three years for carried interest to qualify for the reduced long-term capital gains tax rate. 

Legislation to strengthen anti-money laundering laws affecting real estate will be introduced soon by House Financial Services Chair Maxine Waters (D-CA), above, following a bipartisan bill targeting U.S. assets of Russian oligarchs that was introduced last week in the Senate. (Politico, April 11 and Senate news release, April 8) 

Beneficial Ownership 

• In the Senate, the bipartisan “Kleptocrat Liability for Excessive Property Transactions and Ownership (KLEPTO) Act” was introduced by Sens. Sheldon Whitehouse (D-RI), Bill Cassidy (R-LA), Elizabeth Warren (D-MA), and Roger Wicker (R-MS). The bill (S.4075) includes:
  
  
  • Requirements for the Treasury Department’s Financial Crimes Enforcement Network (FinCEN) to mandate disclosure of beneficial ownership information (the identity of the real person behind an entity) for all real estate transactions through legal entities;
    
    
  • Requirements for FinCEN to extend anti-money laundering safeguards to the real estate sector;
    
    
  • Clarification that any foreign entity that buys or holds real estate in the U.S. should be considered a “reporting company” under the Corporate Transparency Act (CTA). 

FinCEN Efforts 

• The congressional push to address anti-money-laundering measures in real estate follows FinCEN’s work on anti-money laundering regulations that were proposed long before Russia invaded Ukraine.
  
  
• FinCEN solicited comments on a wide range of questions related to its implementation of the CTA – enacted on January 1, 2021 – that effectively bans the registration of anonymously owned shell companies in the United States. (JD Supra, April 26 and Lexology, April 28) 
  
  
• Ten national real estate industry organizations, including The Roundtable, on Feb. 21 submitted detailed comments to FinCEN on proposed anti-money laundering regulations affecting real estate transactions. (Roundtable Weekly, Feb. 25)  

Industry Concerns  

• The Feb. 21 industry letter supports the broad goal of preventing the use of LLCs or any form of real estate to finance illicit acts, money laundering, or terrorism – yet emphasizes that FinCEN should proceed cautiously to not harm legitimate real estate capital flows in the process.
  
  
• The coalition also stated that anti-money laundering rules and requirements should focus on mitigating criminal activity while not burdening legitimate actors with unnecessary or duplicative compliance, which will only increase costs without meaningfully combating money laundering.
  

• The coalition letter emphasizes three main recommendations for FinCEN:
  

1. Study the commercial and multifamily real estate markets to tailor future regulation to how those markets function;
   
   
2. Leverage the CTA and the beneficial ownership database to reduce the necessary scope of further action; and
   
   
3. Distinguish nonbank commercial real estate lenders from true all-cash transactions.

The Roundtable’s Real Estate Capital Policy Advisory Committee (RECPAC) will continue to work with industry partners to respond to FinCEN’s proposals. The industry will also continue to support a balanced approach that inhibits illicit money laundering activity while not restricting capital formation or increasing the regulatory burden on real estate. 

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