Category: Tax Policy

Congressional Lame Duck Session Could Consider Condominium Tax Accounting and Other Real Estate Tax Policy Issues

Posted on by Trey Jackson

Following the Nov. 6 mid-term elections, a “Lame Duck” session of Congress is expected to consider various tax policies of importance to commercial real estate.   

Several tax issues of importance to real estate may be in play during the November “Lame Duck” congressional session, including  condo tax accounting rules; technical corrections; the cost recovery period for qualified improvement property (QIP);and tax extenders.

  • As part of a potential year-end omnibus spending bill to fund the government, tax policies that may be addressed include condo tax accounting rules; technical corrections; the cost recovery period for qualified improvement property (QIP); and tax extenders.  (Roundtable Weekly, Oct. 12) 
  • Current condo tax accounting rules require multifamily developers of buildings with five or more residential units to recognize income and pay tax on their expected profit as construction is ongoing — well before pre-sale transactions are closed and full payment is due from the buyer.  This mismatch of cash flow and tax liability prevents income tax deferment until a condo building is finished.   Home builders of single-family homes, townhouses and row houses are not subject to this accounting rule restriction. 
  • A House bill introduced last summer by Reps. Carlos Curbelo (R-FL) and Joe Crowley (D-NY) aimed to correct this disparity.  Although the Fair Accounting for Condominium Construction Act (H.R. 3659) stalled in 2017, it could serve as a template for inclusion in year-end tax legislation.  The Real Estate Roundtable supports lawmakers’ efforts to pass H.R. 3659. 
  • Other congressional efforts to ensure that development accounting rules treat condos like other residential construction included a 2016 letter from 10 members of the Senate Finance Committee urging regulatory corrections to former Treasury Secretary Jack Lew. 
  • Roundtable President and CEO Jeffrey DeBoer on April 7, 2017 sent a letter to Treasury Secretary Steven Mnuchin   outlining eight regulatory actions the Treasury Department could take to stimulate new real estate investment, job creation, and economic growth.  Among the recommendations addressed in the letter are tax accounting for new condominium construction; the Foreign Investment in Real Property Tax Act, tax treatment of private real estate funds and partnership tax rules. 

Last week, an article on the condo tax accounting issue in The Real Deal included a quote from Roundtable Senior Vice President & Counsel Ryan McCormick, who commented on the outlook for correcting the current rules.  “Legislation may be the most likely route, in light of all the work ongoing at Treasury with tax reform,” McCormick said.

Roundtable Comment Letter Urges Treasury to Simplify, Streamline New Pass-Through Deduction Regulations

Posted on by Trey Jackson

The Real Estate Roundtable on Monday submitted detailed recommendations to the Treasury Department on simplifying and streamlining  the new 20 percent tax deduction for pass-through businesses. (Roundtable letter, Oct. 1)

The   Real Estate Roundtable on Monday submitted detailed recommendations to the Treasury Department on simplifying and streamlining  the new 20 percent tax deduction for pass-through businesses. (Roundtable letter, Oct. 1)

  • Passed as part of last year’s tax overhaul, the deduction can reduce the top tax rate on qualifying pass-through income, including rental income, to 29.6 percent.  Once it is fully implemented, section 199A will be a powerful incentive for capital investment and job growth.
  • The comment letter from Roundtable President and CEO Jeffrey DeBoer suggests four major simplifications that would provide greater certainty, lessen the need for wasteful restructuring, and reduce taxpayer-government controversies.   

 Trade or business definition  
The final regulations should clarify that rental income from real property held for the production of rents will be considered a trade or business for purposes of section 199A;

Aggregation  
The final regulations should allow taxpayers to treat all qualifying real estate rental activities, whether held directly or through a pass-through entity, as if held in a single “trade or business” for purposes of section 199A;

Non-recognition transactions 
When assets with associated unadjusted basis immediately after acquisition (UBIA) are transferred in a non-recognition transaction (such as a like-kind exchange or the contribution or distribution of assets involving a partnership or S corporation), the general rule should be that the UBIA of an asset (and its duration) carries over; and

Separating trades and businesses 
The final regulations should provide rules to help taxpayers ascertain when multiple activities (including multiple activities conducted in a single entity) constitute discrete trades or businesses.

  • With a few exceptions, last year’s Tax Cuts and Jobs Act limited the pass-through deduction to businesses with employees or capital-intensive businesses that invest in long-lived (i.e., depreciable) assets, including real estate.  This so-called wage/capital limitation applies to partnerships, S corporations, and sole proprietorships, but does not apply to ordinary REIT dividends and income from publicly traded partnerships.
  • During the tax reform debate, The Roundtable’s Tax Policy Advisory Committee (TPAC) formed a task force to review the regulations, analyze their impact on real estate investment and jobs, and craft specific recommendations for policymakers. 
  • The pass-through deduction (section 199A) was a key element of Roundtable President and CEO Jeffrey DeBoer’s testimony before the Senate Finance Committee shortly before lawmakers released the first version of the proposal in the fall of 2017.   (Roundtable Weekly, Sept. 22, 2017)

TPAC will continue to offer insight to Treasury officials and congressional tax-writing committees before final regulations are expected by the end of the year.

 

Ways and Means Passes “Tax Reform 2.0” Legislation; House GOP Leaders Plan September Floor Vote

Posted on by Trey Jackson

The House Ways and Means Committee yesterday passed “Tax Reform 2.0” legislation along party lines (21-15) that would make permanent individual and pass-through business tax cuts set to expire at the end of 2025.  House leaders plan a full chamber vote by the end of this month to highlight the GOP’s signature economic policy achievement before the November mid-term elections. (House Ways and Means Committee Mark-up Resourcesand Reuters, Sept. 13)

House Ways and Means Chairman Kevin Brady (R-TX) during the “Tax Reform 2.0” mark-up on Sept. 13.

  • The proposed legislation consists of three bills that would make permanent the individual and pass-through business provisions of the Tax Cuts and Jobs Act (P.L. 115-97); boost employer and individual retirement plans; and allow startup businesses to write off more of their costs.  (Ways and Means summary of Protecting Family and Small Business Tax Cuts Act of 2018 – H.R. 6760)
  • House Ways and Means Chairman Kevin Brady (R-TX) commented on the 2.0 package in an interview with CNBC’s Squawkbox, “We expect to have it ready for a floor vote in September. Locking in the permanence, we think, is fair and it’s pro-growth, creating another million and a half new jobs in the long run.”
  • Despite statements by Brady and House Speaker Paul Ryan (R-WI) about a full House vote this month, attracting support from GOP incumbents in high-tax states may be difficult due to a permanent extension of the new cap on federal deductions for state and local tax deductions (SALT).  The tax reform package is also unlikely to pass the Senate without support from Democrats, although the three House bills may be considered separately.
  • The nonpartisan, congressional Joint Committee on Taxation released a report on Sept. 12 estimates that the House’s second round of tax cuts could cost more than $657 billion over a decade. The costs of making the tax cuts permanent alone would cost about $631 billion, according to the report.

The House will be out of session until Sept. 25, which gives Congress four days to pass government funding by Oct. 1 to avoid a shutdown.  Yesterday, House Appropriations Chairman Rodney Frelinghuysen (R-NJ) announced at a meeting of House and Senate conferees that a deal has been reached on a continuing resolution to keep all of the government funded through at least Dec. 7. 

 

FIRPTA Repeal Bill Introduced; “Tax Reform 2.0” Mark-Up Next Week

Posted on by Trey Jackson

As House Republican leaders this week promoted a second round of tax cuts before the mid-term elections, Reps. Kenny Marchant (R-TX) and Joe Crowley (D-NY) introduced legislation yesterday to repeal the Foreign Investment in Real Property Tax Act of 1980 (FIRPTA). 

A recent report by the Rosen Consulting Group (RCG) estimated that FIRPTA repeal would generate an initial increase of between $65 billion and $125 billion in international investment in U.S. commercial real estate. 

  • FIRPTA subjects foreign investment in U.S. real property to a much higher tax burden than foreign investment in any other class of assets. As a result, overseas investors are often discouraged from investing in U.S. real estate.  FIRPTA effectively deters billions of dollars of capital that would strengthen U.S. infrastructure, expand the tax base and create much-needed domestic jobs.
  • The Marchant-Crowley Invest in America Act would build on FIRPTA reforms Congress passed in the Protecting Americans from Tax Hikes Act of 2015 (the PATH Act) by repealing FIRPTA altogether.  
  • The PATH Act exempted foreign pension funds from FIRPTA and increased the share of a publicly traded US REIT that a foreign investor can hold without triggering FIRPTA.  The PATH Act changes injected billions of dollars in foreign investment into the U.S. real estate market, and contributed to a spike in capital investment in many parts of the country.  (Roundtable Weekly – Oct 13, 2017)
  • A recent report by the Rosen Consulting Group (RCG) estimated that FIRPTA repeal would generate an initial increase of between $65 billion and $125 billion in international investment in U.S. commercial real estate. The report determined that repealing FIRPTA would generate between $26 and $49 billion in total economic activity — a boost of 10 to 30 basis points to U.S. GDP.  This new level of activity would lead to the creation of 147,000 to 284,000 jobs throughout the economy and increase taxpayers’ income by $8 billion to $16 billion.  RCG’s report concluded that repealing FIRPTA would not have a meaningful impact on the federal budget, as FIRPTA accounted for less than 0.002% of federal tax receipts from 2009 to 2013. (Unlocking Foreign Investment in U.S. Commercial Real Estate, July 2017)
  • FIRPTA reform is a long-standing goal of The Roundtable.  The economic benefits of a comprehensive FIRPTA repeal was a focus of testimony by Real Estate Roundtable President and CEO Jeffrey DeBoer before the U.S. Senate Finance Committee on Sept. 19, 2017.  (Roundtable Weekly) 

“In 2015, Congress passed the most significant reforms of FIRPTA since its passage in 1980.  Congress should build on the recent success by repealing FIRPTA outright as part of tax reform. Unleashed by FIRPTA’s repeal, capital from abroad would create jobs by financing new real estate developments, as well as the upgrading and rehabilitation of existing buildings. Architects, engineers, construction firms, subcontractors, and others would be put to work building and improving commercial buildings and infrastructure,” DeBoer testified.  (Roundtable Statement for the Record, Senate Finance Committee Sept 2017) 

Tax Reform 2.0

GOP leaders aiming to pass another round of tax reforms through the House before the November mid-term elections are planning next week to introduce “Tax Reform 2.0” legislation. The bill would make the individual tax cuts contained in President Donald Trump’s December tax overhaul permanent, while expanding taxpayer savings opportunities. 

House Ways and Means Committee Chairman Kevin Brady (R-TX) commented, “… next week we will introduce legislation to make permanent the small business and individual tax cuts that are driving these positive economic numbers. This investment into our workers will produce over a million and a half new jobs, continue to boost wages, and increase America’s competitiveness for years to come.”  (Accounting Today, Sept. 7). 
  • Today, House Ways and Means Committee Chairman Kevin Brady (R-TX) commented on the 2.0 legislation expected to be marked up by his committee next week while reacting to the U.S. Bureau of Labor Statistics’ August jobs report showing a gain of 201,000 jobs.
  • “August was another solid month of job growth, marking over 1.6 million jobs created this year and the highest level of wage gains since 2009. And we know we can do even better to continue creating greater financial security for our workers and Main Street businesses. That’s why next week we will introduce legislation to make permanent the small business and individual tax cuts that are driving these positive economic numbers. This investment into our workers will produce over a million and a half new jobs, continue to boost wages, and increase America’s competitiveness for years to come,” Brady said.  (Accounting Today, Sept. 7)
  • In July, Brady released a two-page framework for “Tax Reform 2.0” that would make individual and small business tax cuts.  Although last December’s Tax Cuts and Jobs Act made corporate tax cuts permanent, most provisions for individuals and pass-through businesses are set to expire at the end of 2025.  Yesterday, Ways and Means Committee Republicans released an updated outline of the Tax Cuts 2.0 package.
  • Bloomberg reported this week that House Majority Whip Steve Scalise stated, “We’re not resting on our laurels. We’re seeing this great economic growth, and so we’re starting to put together tax cuts 2.0.”  (Los Angeles Times, Sept. 5)

The central feature of the reform proposal — a permanent extension of tax cuts for individuals — is unlikely to pass the Senate, where it would need Democratic support (The Hill, July 24).  Additionally,  the introduction of a Tax Reform 2.0 bill may delay legislation addressing tax technical corrections until after the November elections. (Roundtable Weekly, July 20)

 

Ways & Means Launches Hearings on Impact of Tax Reforms; Top Treasury Official Outlines Timeline for Implementation Guidance

Posted on by Trey Jackson

The House Ways and Means Committee this week held the first in a series of hearings on how the Tax Cuts and Jobs Act (TCJA) is affecting job creation and the economy five months after its enactment.

House Ways and Means Chairman Kevin Brady (R-TX) in his  opening statement offered a list of favorable economic statistics and projections that he said are attributable to the new law

Treasury Assistant Secretary Sketches Timetable for Regulations Implementing Tax Reform 
Certain provisions of the TCJA of interest to commercial real estate could be addressed in upcoming IRS guidance or in a congressional technical corrections bill.

  • Acting IRS Commissioner David Kautter on May 12 said that Treasury and the IRS hope to complete proposed regulations on section 199A passthrough deduction by mid- to late-July. (Tax Notes, May 15, “Kautter Talks Timelines for TCJA Guidance Projects” and Roundtable Weekly, May 4).
  • Kautter added that the target date for a notice of proposed rulemaking on section 163(j) business interest deduction limitation is late summer or early fall. (Roundtable Weekly, April 6).)
  • Natalie Tucker, legislation tax accountant at the Joint Committee on Taxation, recently  said that the cost-recovery period for qualified improvement property rises to the level of consideration for a “technical correction.”  While Congress was formulating the TCJA, a new category—qualified improvement property—wasn’t assigned a cost-recovery period, and fell to the 39-year period by default, rather than the intended 15-year period.  That was not the intent of Congress and therefore qualifies for inclusion in a technical corrections bill, according to Tucker.  (Bloomberg Law, May 11, “Agreement Reached on Three ‘True’ Technical Corrections”)

Along with TCJA rulemaking and implementation, the legislation’s impact on CRE will be a focus of discussion at The Roundtable’s Annual Business Meeting and Policy Advisory Committee Meetings on June 14-15 in Washington, DC.

Supreme Court Appears Divided During Oral Arguments on Expanding States’ Authority to Collect Taxes on E-Commerce Purchases; Decision Expected by June

Posted on by Trey Jackson

The U.S. Supreme Court on Tuesday heard oral arguments on a long-awaited case (South Dakota v. Wayfair, Inc., No. 17-494 ) that addresses the constitutionality of states’ authority to collect sales and use taxes on Internet consumer purchases from retailers who do not have a physical presence in a state.

The U.S. Supreme Court heard  oral arguments  on a long-awaited case (South Dakota v. Wayfair, Inc., No. 17-494  ) that addresses the constitutionality of states’ authority to collect sales and use taxes on Internet consumer purchases from retailers who do not have a physical presence in a state. 

The Wayfair case challenges two pre-Internet Supreme Court decisions from 1991 and 1967 (Quill Corp. v. North Dakota, 504 U.S. 298, and National Bellas Hess, Inc. v. Department of Revenue of Illinois, 386 U.S. 753, respectively).  This pair of decades-old opinions exempts many internet merchants from collecting billions of dollars in sales taxes.  The U.S. Government Accountability Office (GAO) estimates that state and local governments could have collected an estimated 8 to 13 billion dollars in 2017 if states were given authority to require sales tax collection from all remote sellers. (GAO report, Dec. 18, 2017).  

During this week’s oral argument on Wayfair, the nine justices offered divided views.  For example, Justice Elena Kagan commented, “Congress is capable of crafting compromises and trying to figure out how to balance the wide range of interests involved here.”  Justice Sonia Sotomayor added, “Is there anything we can do to give Congress a signal it should act more affirmatively in this area?” (CQ, April 17) 

Three justices – Neil Gorsuch, Clarence Thomas and Anthony Kennedy – have expressed a willingness in past writings to rethink the Court’s case law in this area.  On Tuesday, Justice Ruth Bader Ginsburg suggested now is the time for the Quill ruling to be corrected. Ginsburg asked, “If time and changing conditions have rendered it obsolete, why should the court which created the doctrine say, ‘Well, we’ll let Congress fix up what turns out to be our obsolete precedent?'” (Reuters and Wall Street Journal, April 17 / AP, April 18)

Justice Stephen Breyer also noted, “When I read your briefs, I thought absolutely right. And then I read through the other briefs, and I thought absolutely right. And you cannot both be absolutely right.” (Bloomberg Law, April 17) 

During the Supreme Court’s  oral argument on Wayfair , the nine justices offered divided views. See  transcript .

Throughout decades of congressional efforts, legislation to level the tax playing field between Internet-based retailers and “brick and mortar” stores has never passed both chambers. More recently, President Trump has signaled his support for legislation authorizing states to impose sales tax collection requirements on online purchases. (Roundtable Weekly, Feb. 23) 

The Roundtable joined The International Council of Shopping Centers, Investment Program Association, Nareit®, the National Association of REALTORS® , the National Multifamily Housing Council, NAIOP, the American Farm Bureau Federation and the South Dakota Farm Bureau Federation in filing an amicus curiae brief on March 5, urging the Justices to overrule the antiquated, pre-internet, “physical presence” test that imposes collection of sales and use taxes on traditional “brick-and-mortar” retailers – while exempting on-line retailers from those same obligations.  The March brief re-iterated many points set forth by a real estate coalition in an initial amicus brief filed last November. (Roundtable Weekly,   March 9, 2018  and Nov. 3. 2017) 

On Wednesday, a USA Today editorial supported the real estate industry’s viewpoint, while also including an opposing view.  (USA Today, Tax Online Shopping Like All Others, April 17) 

The Supreme Court is expected to render a decision in Wayfair by the end of June. (Wall Street Journal, April 17 and Roundtable Weekly, Jan. 12)

New Reports Measure Impact of Tax Reform on Real Estate Investment and CRE’s Impact on National, State Economies

Posted on by Trey Jackson

Tax reform enacted late last year will cause investment in nonresidential structures to increase by an average of more than $23 billion from 2019-2028, and rise nearly $10 billion this year alone, according to new projections released Monday by the Congressional Budget Office (CBO).  (The Budget and Economic Outlook: 2018 to 2028, April 9)

CBO chart: Effects of the 2017 Tax Act on Investment Through Changes in Incentives affecting Nonresidential and Residential Structures. Click to Enlarge— Page 119 of  full CBO Report

The new report isolates and analyzes the impact of recent tax reform legislation on different types of economic activity, including investment in structures. 

Tax reform’s positive impact on nonresidential investment stems from the corporate and individual rate reductions, as well as the new pass-through deduction.  Combined, these changes reduce the user cost of capital.  Cost recovery rules for structures were largely unchanged in the recent tax policy changes.

CBO projects tax reform will have a dampening effect on investment in residential housing: -$9 billion in 2018, and an average of -$13 billion annually from 2019-2028.  These numbers reflect the combined, net effect of a reduction in investment in owner-occupied housing and an increase in investment in rental housing.  Limitations on the deductibility of property taxes and mortgage interest are putting downward pressure on investment in owner-occupied housing.  Rental property investment, in contrast, benefits from the same tax reforms that affect nonresidential investment. 

As a nonpartisan arm of Congress, CBO’s annual economic and budget outlook is widely watched by the private sector for indications of how recent policy changes are affecting the overall economy.

CBO: Trillion Dollar Deficits by 2020

According to the report, borrowing to fund tax cuts and increased spending will also send deficits soaring past $1 trillion in the coming years and increase the overall debt burden to 96 percent of GDP by 2028.  (The Hill, April 9)

Under the  recent $1.3 trillion spending agreement, defense and non-defense spending will increase by nearly $300 billion over the next two years.  (Roundtable Weekly, March 23)

Although economic growth is projected by CBO to rise to 3.3 percent in 2018 – much higher than the 2.6 percent recorded last year – the estimated growth rate will decrease to 2.4 percent in 2019, followed by a drop to an average of just over 1.7 percent for the subsequent eight years of the ten-year budget period.  (The Washington Post, April 10)

Deficits are also forecast to climb dramatically.  CBO anticipates a deficit of $804 billion in 2018 (43 percent higher than it projected just last June, prior to the tax bill and spending agreement).  The amount of debt held by the public will approach 100 percent of GDP over the next ten years, an amount far greater than any period since World War II.  (CNN, April 11)

NAIOP: Building Accounts for 18.0 % of National Economic Activity in 2017

According to the   NAIOP report , combining residential and nonresidential buildings,  as well as infrastructure, the total impact of construction spending (direct, indirect and induced) – accounted for 18.0 percent of all the nation’s economic activity in 2017. 

In related news, a report recently published by the NAIOP Research Foundation shows that commercial real estate in 2017 supported 7.6 million American jobs and contributed $935.1 billion to the nation’s GDP.  (Economic Impacts of Commercial Real Estate, 2018 Edition, NAIOP)

The annual study, authored by economist Stephen S. Fuller, Ph.D, measures the contributions to GDP, salaries and wages generated, and jobs created and supported from the development and operations of commercial real estate – and includes detailed data on commercial real estate development activity in all 50 states. 

According to the study, combining residential and nonresidential buildings (warehouse/industrial, office, retail, health care, entertainment, education, public safety, religious and lodging) – as well as infrastructure for water, sewer, highways and power, the total impact of construction spending (direct, indirect and induced) — accounted for 18.0 percent of all the nation’s economic activity in 2017.

“The importance of commercial development to the U.S. economy is well established, and the industry’s growth is critical to creating new jobs, improving infrastructure, and creating places to work, shop and play,” said Thomas Bisacquino, NAIOP president and CEO.  (NAIOP news release).

CRE as a driving force of national economic growth, as well as tax reform’s impact on the industry, will be a focus of The Roundtable’s April 25, 2018 Spring Meeting, which will feature  Senate Majority Leader Mitch McConnell (R-KY) and other key policymakers.

Treasury Releases Guidance on New Business Interest Deduction Limit, but Questions for Real Estate Investment Remain

Posted on by Trey Jackson

On Monday, the Treasury Department and the Internal Revenue Service (IRS) released Notice 2018-28, which provides guidance on the new limitation on the deductibility of business interest, (Section 163(j)), enacted in the Tax Cuts and Jobs Act.

In the Feb. 21 letter the Roundtable asked Treasury to clarify     that interest on debt incurred by an owner to fund an investment in a partnership or other entity engaged in a real property trade or business, constitutes interest on debt properly allocable to that real estate business  . 

The Notice focuses on interest expense carryforwards from prior years, corporate interest deductions, and consolidated corporate groups, while leaving unresolved certain key questions for real estate investors.  Taxpayers can rely on the guidance at least until proposed regulations are issued.

In general, for taxpayers with revenue over $25 million, the Tax Cuts and Jobs Act capped the amount of business interest that a business can deduct annually to no more than 30 percent of earnings before interest, taxes, depreciation, and amortization.  The provision includes several exceptions, including an exception critical to real estate for an “electing real property trade or business.”  

Notice 2018-28 addresses a concern that partners in partnerships could effectively double-count certain interest income when calculating the limitation on partner-level borrowing.  Other highlights of the Notice include:

  • Carryforward of interest expense.  The Notice states that forthcoming regulations will allow taxpayers with disqualified interest under the old law to carry forward such interest as business interest under the new law.  Such interest could be disallowed under the new limitation in the same manner as any other business interest. 

  • Corporate business interest.  The Notice clarifies that interest paid by a C corporation is business interest for purposes of the interest limit.  Forthcoming regulations will address whether and when interest paid by a partnership, including a partnership with a corporate partner, should be treated as business interest for the corporate partner. 

  • Consolidated groups.  The Notice confirms that the business interest limit properly applies at the level of a consolidated group.  Forthcoming regulations will address how the interest limit applies to a consolidated group when one of the members is an electing real property trade or business, and to a consolidated group in which a member holds an interest in a partnership that is engaged in a real property trade or business.

  • Earnings and profits.  The Notice clarifies that a disallowed business interest deduction will not affect whether or when the interest expense reduces a C corporation’s earnings and profits.

For real estate investors, however, the Notice leaves unanswered some of the key issues related to the financing of real estate.  For example, The Real Estate Roundtable has asked Treasury to clarify that interest on debt incurred by an owner to fund an investment in a partnership or other entity engaged in a real property trade or business, constitutes interest on debt properly allocable to that real estate business (Comment Letter, Feb 23; Roundtable Weekly, Feb. 23).

The Treasury Department and the IRS are expected to issue additional guidance and regulations in the future, and request comments on the rules described in the notice and what additional guidance should be issued to assist in computing the business interest expense limitation under Section 163(j). (IRS, April 2)

Depending on the outcome of the rule-making process, the new limitation on business interest expense (Section 163(j)) could have significant implications for real estate markets and the financing of real estate transactions.  Clarifying the rules for real estate in the context of tiered arrangements will help avoid potential disruptions.

The Roundtable and TPAC will continue to play an active role in seeking appropriate clarifications affecting the most significant changes to the tax code.

Real Estate Industry Urges Supreme Court to Expand States’ Authority to Collect Taxes on E-Commerce Purchases

Posted on by Trey Jackson

The Roundtable joined an industry coalition in filing an amicus curiae brief on March 5 with the U.S. Supreme Court in South Dakota v. Wayfair, Inc., No. 17-494 – a case that addresses the constitutionality of states’ authority to collect sales and use taxes on Internet consumer purchases. (SCOTUSblog)  

  The Roundtable joined an industry coalition in filing an amicus curiae brief  on March 5 with the U.S. Supreme Court in South Dakota v. Wayfair, Inc., No. 17-494  – a case that addresses the constitutionality of states’ authority to collect sales and use taxes on Internet consumer purchases.

After the high Court accepted Wayfair in January, the case has become the long-awaited judicial vehicle that may level the playing field between Internet-based retailers and “brick and mortar” stores.  The industry amicus brief, drafted by former U.S. Solicitor General Seth Waxman and his colleague Ari Holtzblatt, urges the Supreme Court to overturn a pair of decades-old decisions (e.g., Quill Corp. v. North Dakota (1992) and National Bellas Hess, Inc. v. Department of Revenue of Illinois (1967).  Wayfair directly challenges these pre-Internet opinions, which prohibit states from imposing tax collection obligations on web-based, catalog, and other retailers that lack an in-state physical presence.

In today’s e-commerce driven world, the brief notes, the law should focus on retailers’ economic rather than physical presence, and level the playing field for all retailers who have in-state sales above a certain threshold.

The brief explains how the outmoded court decisions continue to have damaging effects that reach far beyond actual brick-and-mortar outlets. “First, the loss of physical stores, many of which are integral to the social fabric of their communities, increases unemployment and creates a sense of dislocation among community residents. Second, the decline in the retail sector reduces the value of retail real estate, discourages further development of retail properties, and impedes innovation in the retail sector. Third, the lost revenue from sales, property, and income taxes threatens the ability of state and local governments to provide much-needed public services, including those that benefit online retailers,” the brief states.

The Roundtable joined The International Council of Shopping Centers, Investment Program Association, Nareit®, the National Association of REALTORS® , the National Multifamily Housing Council, NAIOP, the American Farm Bureau Federation and the South Dakota Farm Bureau Federation on the amicus brief, which re-iterates many points set forth by a real estate coalition in an initialamicus  brief filed last November. (Roundtable Weekly, Nov. 3, 2017)

Trump Administration Solicitor General Noel Francisco also joined the wave of other submissions to SCOTUS on March 5.  The Justice Department brief states, “In light of internet retailers’ pervasive and continuous virtual presence in the states where their websites are accessible, the states have ample authority to require those retailers to collect state sales taxes owed by their customers.”  (Amicus brief of USA and Wall Street Journal, March 5)

SCOTUS is scheduled to hear oral argument on April 17 and is expected to render a decision by the end of June. (Roundtable Weekly, Jan. 12)

Roundtable Proposes Framework for Implementing the Real Estate Exception to the New Business Interest Deduction Limit

Posted on by Trey Jackson

The Real Estate Roundtable on Wednesday wrote to Treasury Secretary Steven Mnuchin regarding the new limitation on business interest deductibility created in the Tax Cuts and Jobs Act, including rules that allow taxpayers to continue fully deducting interest related to commercial real estate debt. (Roundtable letter, Feb. 21)

The Feb. 21 Roundtable letter urges that Treasury clarify that interest (other than investment interest) on debt that is allocable to an owner of an entity engaged in a real property trade or business is exempt from the new business interest limitation rule – if that trade or business has elected out of the rule.

The exception for interest allocable to a real property trade or business reflects policymakers’ understanding that limits on the deduction for interest expense could have enormous negative consequences for property values, real estate markets, and economic growth.  (Reference: Real Estate Forum, Jan/Feb 2018, Decoding The New Tax Bill)

The Feb. 21 comment letter requests clarification to ensure the real estate exception operates as intended for common real estate ownership arrangements – focusing on the scope and application of the exception for an electing real property trade or business. 

The letter urges that Treasury clarify that interest (other than investment interest) on debt that is allocable to an owner of an entity engaged in a real property trade or business is exempt from the new business interest limitation rule – if that trade or business has elected out of the rule.  

As relevant examples, the letter describes four common scenarios where the financing of a real property trade or business occurs through a tiered structure.  The letter demonstrates why treating the interest expense of an upper-tier entity as properly allocable to the real property trade or business of a lower-tier entity is consistent with the legislative intent and conforms with existing tax rules and principles.  

The letter also addresses the allocation of indebtedness within entities, requesting that Treasury guidance apply the tracing rules found in existing authorities, which are already used for purposes of the passive loss rules.  

During a Feb. 20 tax conference, both Treasury’s Deputy Tax Legislative Counsel Krishna Vallabhaneni and Deputy Assistant Secretary for Tax Policy Dana Trier said a notice on language limiting interest expenses under the new tax law will be issued soon. (Bloomberg Law, Feb. 20).  

This week’s letter is a follow-up to a Jan. 18 Roundtable letter, which identified several areas where Treasury rulemaking would reduce uncertainty and facilitate continued investment. [Roundtable Weekly, Jan. 19]   

As Treasury and Congress continue to focus on implementation and technical corrections to the new tax law, The Roundtable and TPAC will play an active role in seeking appropriate clarifications affecting the most significant changes to the tax code in more than three decades.