Category: Roundtable Weekly

Roundtable Asks Treasury to Clarify Real Estate Exception to New Limit on Business Interest Deductibility

Posted on by Trey Jackson

The Real Estate Roundtable on Tuesday wrote to the Treasury Department and IRS about the new limitation on business interest deductibility enacted in the Tax Cuts and Jobs Act of 2017 (TCJA).  The provision allows qualifying businesses to continue fully deducting interest related to commercial real estate debt.  (Roundtable comment letter, Feb. 26)

The Roundtable’s Feb. 26 letter on business interest deductibility.

  • Roundtable President & CEO Jeffrey DeBoer sent the  detailed comments as Treasury officials work to finalize proposed regulations implementing TCJA’s new section 163(j), which limits the deductibility of business interest to no more than 30% of modified, adjusted taxable income.  Section 163(j) includes a critical exception for real estate.
  • On December 28, 2018 Treasury published proposed regulations clarifying that partner-level debt may qualify for the real estate exception-if the debt is allocable to a partnership engaged in a real property trade or business (RPTOB). 
  • DeBoer notes in The Roundtable’s Feb. 26 letter, “In light of the clear legislative intent to enact a broad real estate exception and its importance to the health and stability of real estate markets, the final Treasury regulations should build on the proposed rules and not limit unnecessarily the ability of a real property trade or business (RPTOB) to elect out of the provisions of section 163(j).”
  • DeBoer adds, “No issue in tax reform is more important to the health and stability of U.S. commercial real estate than the new rules related to the taxation of business-related borrowing.  U.S. commercial real estate is leveraged conservatively with roughly $14 trillion of total property value and $4 trillion of debt.”

The letter includes detailed comments on several 163(j) implementation issues and makes the following recommendations:

The need to preserve the deduction for income-producing real estate was at the center of Jeffrey DeBoer’s testimony and exchanges with Senate Finance Committee members before final passage of the 2017 tax overhaul law. (Roundtable Statement for the Record, Sept. 19, 2017 and video clips). 

 

  • The real estate exception should extend through all “tiered” investment structures. 
  • The real estate exception should apply fully to non-rental activities. 
  • Treasury regulations should not “whipsaw” corporations/REITs through conflicting definitions of a “trade or business” that can effectively block their ability to use the real estate exception. 
  • Treasury regulations should modify the anti-abuse rule for related-party leases. 
  • The small business exception should not prevent otherwise eligible partners from qualifying for the real estate exception. 
  • Debt allocation rules should not undercount real estate assets for purposes of the real estate exception.
  • Treasury regulations should confirm that senior housing constitutes a real property trade or business.

The economic consequences of changes to the deductibility of business interest expense, and particularly the potential impact on real estate, was a central focus of lawmakers during consideration of the historic tax overhaul in 2017.  The need to preserve the deduction for income-producing real estate was at the center of DeBoer’s testimony and exchanges with Senate Finance Committee Chairman Orrin Hatch – and other members of the committee – during the last congressional hearing on business tax reform prior to votes on the TCJA.  (Roundtable Statement for the Record, Sept. 19, 2017 and video clips).  

Commercial Real Estate Executives Report Positive Q1 Market Conditions; Future Clouded By Uncertainty of Economy’s Historic 10-Year Expansion Cycle

Posted on by Trey Jackson

The Real Estate Roundtable’s 2019 Q1 Sentiment Index released today reveals confidence from commercial real estate industry executives that today’s fundamentally sound CRE markets will prove resilient when the decade-long expansion of the U.S. economy inevitably slows down. 

The Real Estate Roundtable’s 2019 Q1 Sentiment Index released today reveals confidence from commercial real estate industry executives that today’s fundamentally sound CRE markets will prove resilient when the decade-long expansion of the U.S. economy inevitably slows down.

  • The historically long economic expansion, stable interest rates and demand driven supply have sustained the current healthy real estate market conditions.  Unpredictability about the future longevity of the economic expansion tempers the forward looking industry outlook.  
  • “The unsettling year-end capital market turbulence caused a degree of early 2019 industry concern.  However, as the first quarter moved forward, the equity markets strengthened and positive job creation continued to fuel steady economic growth.  These conditions bolstered the already well-balanced commercial real estate markets in Q1,” said Roundtable CEO and President Jeffrey D. DeBoer.  “Looking ahead, our CRE executive survey reveals the timing of a natural economic cycle slowdown is concerning, but that is moderated by fundamentally sound commercial real estate markets,” DeBoer added.
  • The Roundtable’s Q1 2019 Sentiment Index registered at 45 – a five point drop from the previous quarter.  [The Overall Index is scored on a scale of 1 to 100 by averaging Current and Future Indices; any score over 50 is viewed as positive.]  This quarter’s Current-Conditions Index of 47 decreased six points from the previous quarter, while this quarter’s Future-Conditions Index of 42 came in at five points lower compared to Q4 2018.

DeBoer noted, “Over the last decade, the commercial real estate industry has not overbuilt or over-leveraged, resulting in disciplined markets that could act as a resilient buffer to any potential slowdown in the U.S. economy.  Our Q1 survey shows industry executives have concerns over unpredictable influences on the economy, such as the recent government shutdown and uncertain outcome of ongoing international trade talks.  Policymakers need to focus on bipartisan pro-growth policies designed to encourage further investment, spur job creation and propel the economy forward for all.” 

Economic Slowdown Forecasts  

St. Louis Fed President James Bullard told CNBC yesterday he expects the economy to slow to a 2.25% annual rate this year from 3% in 2018.  Bullard is a voting member of the Federal Reserve’s Federal Open Market Committee, which meets regularly to set the direction of U.S. monetary policy and interest rates. 

St. Louis Fed President James Bullard told CNBC yesterday he expects the economy to slow to a 2.25% annual rate this year from 3% in 2018.

  • “It does seem the economy is slowing down some – not terribly – but some. That’s not a terrible outcome. I don’t really think we’re in any trouble,” Bullard said.  (CNBC full interview, Feb. 21)
  • Additionally, Fannie Mae yesterday released its February Economic Outlook, which forecasts s GDP growth of 2.2% this year, down from 3.1% in 2018.  (Fannie Mae’s Economic & Strategic Research Group, Feb. 21)   
  • “We reduced first quarter growth expectation slightly, but our forecast for full-year 2019 growth remains unchanged” said Fannie Mae Chief Economist Doug Duncan. “The labor market is strong, unemployment is at a very low level historically, and wages are rising modestly, enticing workers to come off the sidelines. Uncertainty regarding terms of trade remains a downside risk, as does slowing global economic growth.”

Dr. Ken Rosen (Chairman, Rosen Consulting Group) led a discussion during The Roundtable’s Jan. 29 State of the Industry Meeting about recent Fed actions, stock market volatility and how signs of weakness in the Chinese economy may affect future U.S. growth.  (Roundtable Weekly, Feb. 1)

 

Lawmakers Focus on Preventing Second Partial Government Shutdown; House Committees Prep for Action on Tax and Infrastructure Issues

Posted on by Trey Jackson

The federal government this week resumed full-time operations after a 35-day partial shutdown. A three-week bill signed by President Trump last Saturday now funds approximately 25% of the government – including the Department of Homeland Security (DHS), Treasury and the Internal Revenue Service (IRS) – until Feb. 15. If a new funding measure is not passed, the government will face another partial shutdown.

President Trump is scheduled to deliver the State of the Union to Congress on Tuesday, Feb. 5. 
(C-Span) 

  • The nonpartisan Congressional Budget Office released a report on Monday showing the partial shutdown reduced gross domestic product by $3 billion.  (Wall Street Journal, Jan. 28)
  • A House-Senate conference committee began negotiations Wednesday on a border security funding measure to resolve the same issue that caused the shutdown in December – a wall on the Mexican border.
  • President Trump yesterday said, “On Feb. 15th, the committee will come back and if they don’t have a wall, I don’t even want to waste my time reading what they have because it’s a waste of time.”  (Bloomberg, Jan. 31)
  • House Speaker Nancy Pelosi (D-CA) yesterday stated, “There’s not going to be any wall money in the legislation.  However, if they have some suggestions about certain localities where technology, some infrastructure [is appropriate] … that’s part of the negotiation.” 

      If a new funding measure is not passed by Feb. 15, the government will face another partial shutdown. 
  • The House Speaker added that House rules require the congressional conference committee to complete an agreement by Feb. 8 to pass it by Feb. 15.  “In order to have a bill signed by the president, we have to have a signed conference report by next Friday.  So we only have this week plus one day, with the State of the Union in between, to get this done,” Pelosi said.  (The Hill, Jan. 31)
  • President Trump is scheduled to deliver the State of the Union to Congress on Tuesday, Feb. 5, when he is expected to address his proposed increase in border security funding, including $5.7 billion for wall construction.  (Daily Caller, Jan. 30) 

House Committee Hearings on Tax, Infrastructure  

House Ways and Means Committee Chairman Richard Neal (D-MA) recently addressed his legislative priorities.

  • House and Senate tax-writing committees are preparing for action on their policy agendas in the 116th Congress.
  • House Ways and Means Committee Chairman Richard Neal (D-MA) addressed his priorities during a Jan. 24 organizational meeting.  Neal stated that in addition to retirement security and health care costs, “Another issue requiring our attention is America’s infrastructure. We must ensure our infrastructure systems are both safe and efficient  it’s essential for our global competitiveness.  We’ll also closely examine the Republicans’ tax law and its various problems.  So we’ll be conducting thorough oversight of this law – oversight that frankly is well overdue.  (Ways and Means, Neal Statement, Jan. 24.)
  • Rep. Mike Thompson (D-CA), chairman of the Ways and Means’ Subcommittee on Select Revenue Measures (formerly the tax policy subcommittee), said his panel’s first hearing will focus on infrastructure, although he has not set a date for the hearing.  Thompson added that the subcommittee will also review the 2017 tax code overhaul and how tax policies, such as a carbon tax or renewable energy tax breaks, impact climate change.  (CQ, Jan. 31)

Senate Finance Committee Chairman Charles Grassley this week said that retroactive renewal of more than 20 tax deductions that expired at the end of 2017 should be tied to a spending measure to keep the government fully funded beyond Feb. 15.  “The only vehicle that I see in the next few weeks is what comes out of this closing-down conference,” Grassley said,. “And if we don’t have something ready to go when that’s done, have a compromise on extenders … then it’s going to be a long time before we get another opportunity.”  (CQ, Jan. 31)

Senate Banking Committee Releases Housing Finance Reform Outline; Real Estate Coalition Working to Establish GSE Reform Principles

Posted on by Trey Jackson

Senate Banking Committee Chairman Mike Crapo (R-ID) on Feb. 1 released an outline for reforming the nation’s housing finance system, including the Government Sponsored Enterprises (GSEs) Fannie Mae and Freddie Mac.  (Crapo Statement and Housing Reform Outline, Feb. 1)

Senate Banking Committee Chairman Mike Crapo (R-ID) on Feb. 1 released an outline for reforming the nation’s housing finance system, including the Government Sponsored Enterprises (GSEs) Fannie Mae and Freddie Mac. 
(Crapo Statement and Housing Reform Outline, Feb. 1)
  • Fannie and Freddie form the underpinnings of a $5.3 trillion financial market for single-family and multifamily mortgages.
  • Crapo’s outline states, “The multifamily businesses of Fannie Mae and Freddie Mac will be sold and operated as independent guarantors.”  The proposal outlines a new housing finance system that aims to: 
    • Reduce the systemic, too-big-to-fail risk posed by the current duopoly of mortgage guarantors
    • Preserve existing infrastructure in the housing finance system that works well, while significantly increasing the role of private risk-bearing capital
    • Establish several new layers of protection between mortgage credit risk and taxpayers
    • Ensure a level playing field for originators of all sizes and types, while also locking in uniform, responsible underwriting standards
    • Promote broad accessibility to mortgage credit, including in underserved markets  
  • The Committee has also tentatively scheduled a Feb. 14 nomination hearing on Mark Calabria as director of the Federal Housing Finance Agency (FHFA). Calabria is currently chief economist to Vice President Mike Pence.  The FHFA oversees Fannie Mae and Freddie Mac, which have been held in conservatorship since September 6, 2008.  ( Wall Street Journal, Feb. 5)  

    “Housing finance reform must appropriately balance taxpayer protections with the need to establish an efficient marketplace that can provide strong and sustained mortgage liquidity in single family and multifamily markets – as well as affordable housing,” said Roundtable President and CEO Jeffrey DeBoer. 

     

  • White House Spokeswoman Lindsay Walters stated on Tuesday, “Housing finance reform is a priority for the administration. The White House expects to announce a framework for the development of a policy for comprehensive housing finance reform shortly.”  She added the administration intends to work with Congress to formulate a reform plan that will address taxpayer risks and housing affordability. (Bloomberg, Jan. 29) 

House Financial Services Committee Chairwoman Maxine Waters (D-CA) is expected to oppose measures that seek to limit the government’s role in the mortgage market. 

Industry Developing Principles for Reform  

The Real Estate Roundtable continues to work as part of an industry coalition to develop certain principles that would form the foundation of GSE reform legislation 

  • “Housing finance reform must appropriately balance taxpayer protections with the need to establish an efficient marketplace that can provide strong and sustained mortgage liquidity in single family and multifamily markets – as well as affordable housing,” said Roundtable President and CEO Jeffrey DeBoer.  

“Reform should encourage the transfer of appropriate credit risk to the private sector, while building on the highly effective risk sharing mechanisms utilized in Fannie Mae’s existing Delegated Underwriter Servicing (DUS) program and Freddie Mac’s K Deals,” DeBoer added.

 

Treasury Releases Highly Anticipated Final Regulations on New Pass-Through Deduction

Posted on by Trey Jackson

The Treasury Department on Jan. 18 issued final regulations and new guidance on the 20 percent deduction for qualified pass-through business income (under Internal Revenue Code section 199A).

The Treasury Department on Jan. 18 issued  final regulations  and new guidance on the 20 percent deduction for qualified pass-through business income (under Internal Revenue Code section 199A).

  • The new 20% deduction for pass-through business income is one of the most important – and complex – elements of the 2017 tax overhaul law.  The deduction was designed to provide relief to the 30 million businesses in the United States that are not C corporations, and thus don’t benefit from the corporate tax cut. 
  • The proposal was a key topic of Roundtable President and CEO Jeffrey DeBoer’s testimony before the Senate Finance Committee shortly before lawmakers released the first version of their tax overhaul in the fall of 2017, and The Roundtable was closely involved in the legislative development of the provision.  (Roundtable Weekly, Sept. 22, 2017) 
  • The final regulations are largely positive, addressing several concerns highlighted in Roundtable comments that could have limited taxpayers’ ability to apply the deduction against real estate rental income. 
    • For example, Treasury agreed with The Roundtable and reversed its prior position on how non-recognition transactions, such as a like-kind exchange or a contribution of property to a partnership, affect the pass-through deduction.  The proposed regulations effectively would have penalized taxpayers for engaging in non-recognition transactions. 
    • Treasury adopted the Roundtable request to allow for aggregation of trades or businesses at the “entity” level, not just the individual level.  Treasury also adopted the Roundtable request to allocate the basis of a property to partners based on “book” depreciation rules, not tax depreciation rules. 
  • In certain areas, the final rules did not adopt specific recommendations offered in Roundtable comments, but nonetheless set forth helpful guidance. 

    The proposal was a key topic of Roundtable President and CEO Jeffrey DeBoer’s testimony before the Senate Finance Committee shortly before lawmakers released the first version of their tax overhaul in the fall of 2017.  ( Roundtable Weekly, Sept. 22, 2017) 

    • The Roundtable had asked Treasury to clarify that all real estate rental income would be considered income from a trade or business—a requirement of the statute.  Treasury declined to go this far, but did issue a proposed revenue procedure (IRS Not. 2019-07) that would establish a safe harbor for real estate rental income earned by taxpayers who spend 250 hours, directly or indirectly, on the activity. 
    • The Roundtable had encouraged Treasury to allow taxpayers to aggregate all real estate rental activities, including those conducted in separate entities, at the individual level.  While Treasury did not adopt this simplification, it did offer helpful new examples to clarify when real estate activities are sufficiently similar to permit aggregation by individuals.
  • In addition, proposed regulations issued alongside the final rules ensure that investors who receive REIT dividends indirectly through an interest in a mutual fund are eligible for the pass-through deduction—a priority for The Roundtable, Nareit, and others. 
  • TPAC will discuss issues related to the Section 199A regulations during its next meeting on Jan. 30 in Washington, held in conjunction with The Roundtable’s State of the Industry (SOI) Meeting.  

House Ways and Means Committee Chairman Richard Neal will also participate in the SOI meeting.  Neal – the long-standing co-chair of the House Real Estate Caucus – will discuss prospects for tax policy legislation with Roundtable Board Member John Fish (Chairman and CEO, SUFFOLK) on Jan. 29. 

President Trump, Congress Agree to 3-Week Shutdown Reprieve As Negotiations Proceed Over Border Security

Posted on by Trey Jackson

President Trump today announced an agreement with congressional Democrats to reopen the federal government for three weeks—under the condition that negotiations proceed over border security, including his demand for a wall on the Mexican border.

After announcing the agreement, President Trump added, “We really have no choice but to build a powerful wall or steel barrier.  If we don’t get a fair deal from Congress, the government will either shutdown on Feb. 15 again or I will use the powers afforded to me under the laws and constitution of the United States to address this emergency.” 
(C-Span, Jan. 25)

  • The short-term agreement comes after two bills in the Senate to reopen the government failed yesterday, largely along party lines.  Today’s agreement would pave the way for Congress to quickly pass a Continuing Resolution (CR), restoring operations to approximately 25 percent of government agencies affected by the shutdown and providing back pay for 800,000 federal workers who have been furloughed or told to report to work without pay. 
  • The agreement would allow funding for agencies affected by the shutdown to continue at current levels through Feb. 15—including the Department of Homeland Security (DHS), which oversees border and immigration issues (such as the EB-5 investment program).   The deal would also require negotiations to proceed between the House and Senate over a full-year DHS funding bill that would address all aspects of border security.   
  • After announcing the agreement, Trump added, “We really have no choice but to build a powerful wall or steel barrier.  If we don’t get a fair deal from Congress, the government will either shutdown on Feb. 15 again or I will use the powers afforded to me under the laws and constitution of the United States to address this emergency.” (C-Span, Jan. 25)
  • The Senate approved the funding legislation tonight by a voice vote. The House followed, passing the CR by unanimous consent and sending the bill to President Donald Trump for his signature.  (The Hill and CNNand  Associated Press, Jan. 25)
  • The reprieve comes as airports along the East Coast reported delays today due to a lack of air traffic controllers. The Federal Aviation Administration (FAA) reported flight delays to LaGuardia Airport in New York, Newark’s Liberty International Airport in New Jersey and Philadelphia International Airport. (FAA Statement, Jan. 25)
  • Earlier this week, three aviation unions — the National Air Traffic Controllers Association, the Air Line Pilots Association and the Association of Flight Attendants-CWA — issued a statement citing the shutdown’s increasing threat to air transportation safety.  “We cannot even calculate the level of risk currently at play, nor predict the point at which the entire system will break.  It is unprecedented,” according to the statement. (AFA news release, Jan 23)

During the shutdown, the Environmental Protection Agency (EPA) deactivated the website of its Energy Star program. The Roundtable’s Sustainability Advisory Policy Committee (SPAC) has worked closely with EPA on both their Energy Star whole-building and tenant-space labeling programs.

  • The shutdown also posed a risk that payments by federal tenants to office owners could not be met. The General Services Administration (GSA), which makes the government’s rent payments in arrears after the end of the month, faced the repercussions of the shutdown by posting a message on its website to landlords.  The GSA stated it “is aware of concerns from the Lessor community regarding GSA’s ability to make timely rent payments,” and “is diligently exploring all available options.”  (Bisnow, Jan. 18)  A map showing the GSA’s lease footprint illustrated the potential impact of the shutdown, as the agency rents over 187 million square feet for federal workers and business. (Bloomberg, Jan. 4)
  • During the shutdown, the Environmental Protection Agency (EPA) deactivated the website of its Energy Star program.  The deactivation could impact local-level regulatory compliance deadlines in major urban markets that require owners to use EPA’s tools to benchmark and publicly disclose building energy consumption data.  The Roundtable’s Sustainability Advisory Policy Committee (SPAC) has worked closely with EPA on both their Energy Star whole-building and tenant-space labelingprograms.
  • On Jan. 17, Energy and Commerce Committee Chairman Frank Pallone, Jr. (D-NJ) wrote to EPA Acting Administrator Andrew Wheeler requesting information on the Energy Star’s site deactivation.   Pallone also announced this week that the full Committee will hold a hearing on Jan. 31 about the impact of the shutdown on affected agencies within its jurisdiction.

The impact of the partial government shutdown and prospects for a long-term resolution beyond Feb. 15 will be a focus of discussion during The Roundtable’s State of the Industry Meeting and Policy Advisory Committee meetings on Jan. 29-30 in Washington, DC.

Partial Government Shutdown Continues Over Border Wall Disagreement

Posted on by Trey Jackson

Unless an agreement with Congress is reached soon, President Trump this week indicated he is considering declaring a national emergency in order to fund the construction of a border wall on the southern border.  A national emergency declaration would face significant legislative and legal opposition, yet it could create a path to end the partial government shutdown that tomorrow will become the longest in U.S history, exceeding the 21-day shutdown of 1995-96.  (New York Times, Jan. 9 / NBC News, Jan. 10 / Politico, Jan. 10

Unless an agreement with Congress is reached soon, President Trump this week indicated he is considering declaring a national emergency in order to fund the construction of a border wall on the southern border.

  • Federal Reserve Chairman Jerome Powell said this week that if the current situation is prolonged, it would start to noticeably affect the economy.  “If we have an extended shutdown, I do think that would show up in the data pretty clear.”  Powell added that  the full economic impact of closed government agencies is difficult to track because data usually provided by the Commerce Department is not currently available, due to the shutdown.  (Economic Club of Washington  video interview at 13:30, Jan. 10)
  • Nine of the 15 Cabinet-level departments remain unfunded, including Agriculture, Homeland Security, State, Transportation, Interior and Justice.  800,000 federal workers won’t receive paychecks due today. (AP, Jan. 11).  Historically, federal workers ultimately do receive back pay for government shutdowns.
  • According to S&P Global Ratings Chief U.S. Economist Beth Ann Bovino, “We estimated that this shutdown could shave approximately $1.2 billion off real GDP in the quarter for each week that part of the government is closed.” (CNBC, Jan. 11) White House Council of Economic Kevin Hassett last week offered a similar assessment, estimating economic output would decrease by about 0.1 percent every two weeks. (Bloomberg, Jan. 3)
  • President Trump this week cancelled a planned Jan. 21 trip to the annual World Economic Forum in Davos, Switzerland after recently saying he may keep the government closed for “months or even years.”  (Time, Jan. 10 and AP, Jan. 4) 

    Federal Reserve Chairman Jerome Powell said that if the current situation is prolonged, it would start to noticeably affect the economy.  “If we ave an extended shutdown, I do think that would show up in the data pretty clear.”  (Economic Club of Washington video interview at 13:30, Jan. 10, 2019)

  • Despite the shutdown, The IRS announced this week that the 2018 tax filing season will begin on Jan. 28.  Last year, the IRS issued nearly $300 billion in tax refunds to 102 million taxpayers between January and May, with an average refund of more than $2,700.  Any major disruption in tax refunds could dampen economic growth.  A detailed IRS contingency plan for handling the tax filing season and enforcement and taxpayer assistance is expected soon. (IRS, Jan. 7 and TIME, Jan. 9) 
  • Additionally, until the shutdown ends, the EB-5 Immigrant Investor Regional Center Program and federal cleanups at Superfund sites around the nation are suspended.
  • The National Association of Realtors yesterday reported that the partial shutdown is starting to cause transactional delays related to federal housing, mortgage, and other programs of interest to the real estate industry (NAR, Jan. 10). 
  • “All the fluctuations that’s going on puts a pause on companies deciding what long-term investments to make,” NAR chief economist Lawrence Yun said. “Do they actively purchase a commercial property knowing there could be further disruption in the future? They could be more hesitant or go on a more [smaller] scale.”  (Commercial Observer, Jan. 2)
  • Negotiations over the border wall impasse broke down this week when President Trump ended a meeting with Democratic leaders. Trump tweeted that the meeting had been a “total waste of time” and reported that when House Speaker Nancy Pelosi (D-CA) told him that Democrats wouldn’t approve border-wall funding, “I said bye-bye, nothing else works!”  (Wall Street Journal, Jan. 10) 

The effects of the government shutdown and prospects for policymaking in the new Congress will be topics for discussion during The Roundtable’s Jan. 29-30 State of the Industry Meeting in Washington, DC.

 

Tax Technical Corrections Draft Bill Released by Outgoing House Ways and Means Chair; New Chair Plans Hearings on Tax Overhaul’s Impact

Posted on by Trey Jackson

Outgoing House Ways and Means Chairman Kevin Brady (R-TX) released a draft bill on Jan. 2  that includes tax technical corrections to previously enacted legislation, including the Tax Cuts and Jobs Act (TCJA) overhaul. 

Outgoing House Ways and Means Chairman Kevin Brady (R-TX) released a  draft bill  on Jan. 2  that includes tax technical corrections to previously enacted legislation, including the  Tax Cuts and Jobs Act (TCJA)  overhaul. 

  • Rep. Brady stated, “We are releasing this discussion draft of technical corrections with respect to the TCJA and other tax legislation to inform stakeholders and provide the American people an opportunity to submit feedback on the draft provisions.  I look forward to gaining valuable feedback from the public and working with my colleagues in the House and Senate on both sides of the aisle as we continue to provide clarity and certainty for job creators across the country seeking to invest in their workers and our communities.”  
  • The path forward for a technical corrections bill in the 116th Congress will be set by the new Ways and Means Chairman – Rep. Richard Neal (D-MA).
    • Clarification that the recovery period for qualified improvement property is 15 years, or 20 years under the alternative depreciation system (ADS);
    • Clarification that REIT dividends received indirectly by a mutual fund shareholder qualify for the 20% pass-through deduction;
    • Clarification that the Opportunity Zone tax deferral benefit only extends to capital gains – a position that was also incorporated in Treasury’s October proposed regulations.
    • Numerous other clarifications in the Brady draft relate to business interest (§ 163(j)), the pass-through deduction (§ 199A), and the limitation on active losses (§ 461(l).  

The path forward for a technical corrections bill in the 116th Congress will be set by the new Ways and Means Chairman – Rep. Richard Neal (D-MA) . 
  • There is strong bipartisan support for certain technical corrections, such as the 15-year recovery period for qualified improvement property, which could help spur action on a larger tax package.  
  • However, the current draft does not clarify that a business electing out of the new interest limitation is subject to a 30-year ADS recovery period for residential rental property placed in service before 2018.  The issue could be addressed in future versions of the legislation.  
  • Prospects for enactment of technical changes is uncertain, although Ways and Means Chairman Neal stated this week that hearings on tax legislation may be held in early 2019 on the TJCA’s impact and alternative proposals.  Neal also suggested that he will seek agreement with Ranking Member Brady on legislation addressing healthcare, infrastructure and retirement savings. (Wall Street Journal and Tax Notes, Jan. 4)

The Roundtable’s Tax Policy Advisory Committee (TPAC) will review these proposals, which will be a focus during TPAC’s Jan. 30 meeting, held in conjunction with The Roundtable’s State of the Industry Meeting in Washington, DC.  

 

Treasury Proposes Detailed Rules for New Restrictions on Deducting Business Interest

Posted on by Trey Jackson

On Tuesday, the Treasury Department released proposed regulations governing the new limitation on the deductibility of business interest expense, including the exception for real estate businesses. 

On Tuesday, the Treasury Department released proposed regulations governing the new limitation on the deductibility of business interest expense, including the exception for real estate businesses. 

  • Under the Tax Cuts and Jobs Act (TCJA), businesses generally can no longer deduct their interest expense to the extent it exceeds 30 percent of their annual earnings before interest, tax, depreciation and amortization (EBITDA).  Business interest deductibility was a key issue in Real Estate Roundtable President & CEO Jeffrey DeBoer’s testimony before the Senate Finance Committee shortly before consideration of the tax bill.  (Roundtable Statement for the Record, Sept. 19, 2017)
  • DeBoer testified that the proposal could have severe unintended consequences.  Noting that the cost of debt is a necessary expense that must be accounted for when measuring income, he testified that our capital markets are the envy of the world and that responsible, appropriate leverage helps entrepreneurs and contributes to economic growth and job creation. (Roundtable Weekly, Sept. 29 and testimony video clips)
  • The final bill included a critical exception from the interest limit for an electing real property trade or business.  An electing real property trade or business is defined broadly to cover: any real property development, redevelopment, construction, reconstruction, acquisition, conversion, rental, operation, management, leasing, or brokerage trade or business. 
  • In February, the Roundtable submitted comments to Treasury with recommendations for how the real estate exception should work in the case of tiered business structures, and in the case of businesses that involve both real estate and non-real estate activities.  (Roundtable Weekly, Feb. 23, 2018)  

    Business interest deductibility was a key issue in Real Estate Roundtable President & CEO Jeffrey DeBoer’s testimony before the Senate Finance Committee shortly before consideration of the tax bill.  (Roundtable Statement for the Record, Sept. 19, 2017 and  video clips ). 
  • The proposed regulations are largely favorable.  Most importantly, the regulations clarify that partner-level borrowing qualifies for the real estate exception. Thus, at the election of the taxpayer, the real estate exception can extend to debt that is incurred by a partner to acquire an interest in a partnership that is engaged in a real property trade or business.  In addition, the regulations confirm the broad definition of a real property trade or business.  The regulations also clarify that capitalized interest, which commonly arises during the development of real estate, is not subject to the interest limit.
  • With respect to taxpayers engaged in both real estate and non-real estate activities, the proposed regulations generally would allocate and apportion debt based on the relative amount of the taxpayer’s adjusted basis in assets used in those activities.  However, taxpayers would directly trace and allocate qualified nonrecourse indebtedness to the asset securing the loan (with no apportionment).  This latter rule should result in the allocation of a larger share of debt to assets qualifying for the real estate exception.
  • Some concerns remain.  Notably, the attribution rule that allows partners to qualify for the real estate exception based on partnership-level activities does not extend broadly to all upper-tier borrowing for investment in lower-tier real estate businesses.  Thus, except in limited circumstances, debt incurred by a taxpayer to invest in a corporation (or REIT) that is engaged in a real property trade or business is not eligible for the real estate exception. 

The Roundtable’s Tax Policy Advisory Committee is continuing to review the 439-page regulatory package to understand its full implications for the financing of U.S. real estate.  Comments on the proposed regulations will be due 60 days after their publication in the Federal Register.

Roundtable Submits Recommendations to Improve ENERGY STAR Scoring Models; EPA Seeks Additional Feedback from Building Owners

Posted on by Trey Jackson

The Real Estate Roundtable on Nov. 26 sent recommendations to the U.S. Environmental Protection Agency (EPA) to improve the agency’s ENERGY STAR scoring methods, which rate a building’s energy efficiency performance.  (Roundtable Letter and Recommendations)

The  Real Estate Roundtable on Nov. 26 sent recommendations to the U.S. Environmental Protection Agency (EPA) to improve the agency’s ENERGY STAR scoring methods, which rate a building’s energy efficiency performance.  (Roundtable Letter and  Recommendations)

  • Nearly 35,000 buildings and plants – representing more than 5 billion square feet of commercial space – have earned EPA’s ENERGY STAR.  Pension funds and other institutional investors frequently rely on the label as a market signal for well-managed assets with smaller carbon footprints.  Business tenants also seek to locate in ENERGY STAR-certified buildings to lower their utility expenses.
  • Last August, EPA announced the first updates to its ENERGY STAR scoring models in over a decade.  Initial analyses by The Roundtable’s Sustainability Policy Advisory Committee (SPAC) and other stakeholders indicated that EPA’s new models produced arbitrary scoring results.  Offices over 500,000 square feet in size, and buildings located in colder climates requiring more heating throughout the year, appear to have sustained the most significant ENERGY STAR score declines.
  • Roundtable President and CEO Jeffrey DeBoer in October told the Wall Street Journal, “Revisions to ENERGY STAR are much needed and very important.  However, to be truly effective the data sources and projections relied upon in the revision must be transparent and reflect industry leading practices.” (Wall Street Journal, Oct. 9)
  • The Roundtable’s Nov. 26 summary and  recommended changes to EPA’s scoring methods seek to ensure a level-playing field for the ENERGY STAR label – so that buildings of all sizes located in varying climate zones across the country are rated fairly.  
  • EPA has requested additional data from owners and managers to test its methods on specific buildings and portfolios.  Stakeholders interested in working with the agency to assess how particular properties have fared since new ENERGY STAR scores were released last August should consult EPA’s website, “How to Respond to Data Requests in Portfolio Manager.” 

EPA plans to wrap-up its review period and resume issuing ENERGY STAR building labels by next spring.