Category: Tax Policy

Coalition Urges Treasury to Exempt Unrealized Gains from New Corporate Alternative Minimum Tax

Posted on by Trey Jackson

IRS logoA coalition of trade organizations that includes The Real Estate Roundtable asked the IRS yesterday to issue regulatory guidance clarifying that unrealized gains and losses are not subject to tax under the new corporate alternative minimum tax (CAMT). Enacted under the Inflation Reduction Act of 2022, CAMT levies a 15% minimum tax on the adjusted financial statement income (book income) of certain large corporate taxpayers. (Coalition letter, March 15)

CAMT Implementation

  • Starting this year, the CAMT applies to firms with an average of $1 billion or more in profits in any three-year period and to foreign-parented U.S. firms with profits of over $100 million if the aggregated foreign group has over $1 billion in profits. Congress expressly exempted REITs from the tax. (Congressional Research Service, Jan. 19, 2023)

  • The coalition’s comments respond to a Dec. 27, 2022 IRS Notice (2023-7) that states Treasury may issue future guidance intended “to help avoid substantial unintended adverse consequences” from the interaction of mark-to-market accounting and the CAMT. Congress granted the Treasury Secretary substantial regulatory authority to implement the new tax. (Debevoise & Plimpton, Jan. 3 and Gibson Dunn, Jan. 6)

Coalition Weighs In CAMT letter - image

  • The coalition, which includes the American Investment Council, the U.S. Chamber of Commerce, and others, emphasized in its comments that providing a comprehensive exclusion for unrealized gains and losses that are marked-to-market for book purposes would be consistent with the legislative intent of the CAMT—and Congress’s rejection of prior proposals to tax unrealized gains.

  • The coalition’s comments note that Treasury’s clarification would help avoid a patchwork of unprincipled and ad hoc rules that leave certain categories of unrealized gains and losses subject to tax. The result could distort investment decisions, create a disincentive for taxpayers to elect fair value accounting, and force taxpayers to sell real estate and other assets or borrow money to pay their taxes.

The Roundtable’s Tax Policy Advisory Committee (TPAC) and its partner organizations will continue to work with federal regulators on the CAMT guidance to prevent the unintended taxation of unrealized real estate gains and losses.

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President Biden’s FY2024 Budget Aims to Raise Taxes on Real Estate, Capital Formation, and Investment

Posted on by Trey Jackson

FY2023 Budget Cover

The Biden administration yesterday proposed a $6.9 trillion FY2024 budget that includes $3 trillion in deficit reduction and $2.2 trillion in tax increases over the next decade on corporations, high-earning households, and certain business activities, including real estate investment. (White House budget materials and Treasury Department news release)

Blueprint for Negotiations

  • Real Estate Roundtable President and CEO Jeffrey DeBoer said, “Congress has rejected several of these same tax proposals in the past. In particular, Congress has said no to proposals to double the capital gains rate, tax gains reinvested in property of a like-kind, or taxing unrealized gains. We will strongly urge that these counter-productive proposals again be rejected. They have weak policy support, are poorly timed and quite risky given the current uncertain economy.”
  •  Of note for real estate:
    • Capital Gains Rate
      The top, combined tax rate on long-term capital gains would nearly double from 23.8% (20% + 3.8% net investment income tax) to 44.6%. This results from increasing the maximum capital gains rate from 20% to 39.6% and a new proposal to increase the net investment income tax from 3.8% to 5%.
    • Mark-to-Market Tax on Unrealized Capital Gains
      The FY 2024 budget carries over President Biden’s proposal from last year, imposing a retroactive, annual minimum tax of 25% on the income and unrealized gains of taxpayers with wealth (assets minus liabilities) exceeding $100M.
    • Real Estate Professionals
      The budget also carries over a proposal to extend the 3.8% net investment income tax to real estate professionals and other pass-through business owners who are currently exempt from the tax because they are active in their business.

Tax ProposalsChicago cityscape sky view

  • Other real estate-related tax proposals include:
    • Taxing carried interest as ordinary income
    • Limiting the deferral of gain from like-kind exchanges
    • Increasing the top tax rate on ordinary income to $39.6%
    • Ending step-up in basis and taxing unrealized capital gains at death
    • Expanding the limitation on excess business losses for non-corporate taxpayers by converting the limitation from a 1-year deferral to a permanent compartmentalization of active pass-through losses
    • Modifying tax rules for grantor retained annuity trusts (GRATs) and grantor trusts
    • Recapturing and taxing real estate depreciation deductions at ordinary income tax rates
  • The budget also devotes $59 billion to provisions aimed at increasing the supply and availability of affordable housing, as well as $10 billion “to incentivize State, local, and regional jurisdictions to make progress in removing barriers to affordable housing developments, such as restrictive zoning.” Tax incentives in the budget include an expansion of the low-income housing tax credit (LIHTC) and a new tax credit for the development of affordable, owner-occupied housing.

These tax issues and other policies affecting CRE will be discussed during The Roundtable’s Spring Meeting on April 24-25 in Washington.

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Roundtable, Trade Organizations Urge Treasury to Withdraw FIRPTA Regulatory Proposal

Posted on by Trey Jackson

The Real Estate Roundtable and 16 other trade organizations weighed in this week against a proposed IRS rule that would expand the reach of the Foreign Investment in Real Property Tax Act (FIRPTA) of 1980.

Retroactive Rewrite

  • On December 29, Treasury and the IRS released proposed regulations that would redefine what constitutes a domestically controlled REIT and impose capital gains taxes, through FIRPTA, on investment structures that taxpayers have used for decades when planning real estate and infrastructure investments in the United States.
  • For purposes of FIRPTA and the exemption for domestically controlled REITs, the proposed look-through rule would no longer treat a taxpaying U.S. C corporation (that is a shareholder of a REIT) as a U.S. person if more than 25% of the owners of the C corporation are foreign. The result would be that many REITs previously exempt from FIRPTA would be thrust, retroactively, into the discriminatory tax regime.

Industry Response

  • On Monday, The Roundtable, Nareit, American Investment Council, Managed Funds Association, and ICSC submitted detailed comments to Treasury urging withdraw of the proposed look-through rule. The organizations wrote that the rule would “reverse decades of well-settled tax law, severely misconstrue the statute, and contradict Congressional intent,” as well as potentially “impair real estate’s access to foreign capital at a critical economic juncture and undermine foreign investors’ confidence in the stability and predictability of U.S. tax rules.” (Letter to Treasury, Feb. 27)
  • On Wednesday, The Roundtable and 14 other real estate trade organizations wrote to the congressional tax-writing committees asking Members of Congress to encourage the Treasury Department and IRS to withdraw the rule, which could put property value, jobs, and communities at risk unnecessarily. (Letter to congressional tax committees, March 1)
  • Treasury’s regulatory package also included favorable final rules regarding the FIRPTA foreign pension fund exemption and a helpful proposal related to real estate investments and the tax exemption for foreign governments.

The principal drafters of the Treasury comment letter were Roundtable Tax Policy Advisory Committee (TPAC) members David Levy (Weil Gotshal) and David Polster (Skadden), as well as Nickolas Gianou (Skadden). TPAC members also met virtually with Treasury officials on February 15 to discuss the proposed regulation. TPAC will remain active and engaged with the administration on this issue as the process unfolds.

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House Republicans Reintroduce Bill to Make TCJA Deductions and SALT Cap Permanent

Posted on by Trey Jackson

House Ways and Means Committee Vice Chairman Vern Buchanan (R-FL)Tax provisions affecting individuals and small businesses originally enacted as part of the Tax Cuts and Jobs Act (TCJA) of 2017—along with the state and local tax (SALT) deduction cap—would be made permanent under legislation reintroduced this month by House Ways and Means Committee Vice Chairman Vern Buchanan (R-FL), above. (The Bond Buyer, Feb. 13 and Legislative Text)

The TCJA Permanency Act

  • Buchanan’s bill (H.R.976) includes a Roundtable-supported provision to make permanent the 20 percent deduction for qualified pass-through business income (Section 199A). The legislation would also permanently lower tax rates for individuals and families and maintain the higher standard deduction.
  • There are currently 83 co-sponsors of The TCJA Permanency Act. Buchanan has led five of the six Ways and Means Subcommittees and currently sits on the Joint Committee on Taxation, a small group of the most senior tax policy writers in Congress. (Buchanan news release, Feb. 13)
  • Without Congressional action, 23 different provisions of the 2017 Republican tax law are set to expire after 2025, including the SALT deduction cap. Buchanan originally filed legislation to make the TCJA cuts permanent last September during the Democratic-controlled 117th Congress.
  • Buchanan stated that funding for the Federal Aviation Administration could be a legislative vehicle to attach the TCJA bill, since no major standalone tax bills are expected this year. (BGov, Feb. 23)

SALT Caucus Relaunched

SALT Caucus 2023

  • ​More than 20 members of the House relaunched the SALT Caucus this month as part of their push to repeal the $10,000 cap limit on the federal deduction for state and local taxes. (News conference video, Feb. 8 and Tax Notes, Feb. 9)
  • The cap is scheduled to sunset after 2025, but SALT caucus members want relief sooner while pledging to fight attempts to extend the cap. (Rep. Gottheimer news release, Feb. 9)
  • “I like the odds of having a bunch of new Republicans from states that need to restore SALT,” said SALT Caucus Co-Chair Josh Gottheimer (D-NJ). “So if you want to talk, this is the caucus to talk to to get this done, to restore SALT and make life more affordable.” (Roll Call, Feb. 8)

More than 30 states and local jurisdictions have enacted a SALT workaround for pass-through businesses, S-corporations, and some LLCs. (CNBC video Feb. 13)

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New House Republican Ways and Means Chairman Promises Focus on Working Families, Wages, and Investment

Posted on by Trey Jackson

House Ways and Means Committee Chairman Jason Smith (R-MO)

Rep. Jason Smith (R-MO), above, won a three-candidate race this week in the 118th Congress to become the youngest-ever chairman of the powerful House Ways and Means Committee, which has jurisdiction over tax policies affecting commercial real estate. Former Ways and Means Chair Richard Neal (D-MA) now becomes the panel’s ranking member. (Roll Call and Wall Street Journal, Jan. 9)

Chairman Smith

  • Rep. Smith is a 42-year-old lawyer who was first elected to the House in 2012. He served as the top Republican on the House Budget Committee in the previous Congress, and is a close ally of new House Speaker Kevin McCarthy (R-CA). (PoliticoPro, Jan. 9)
  • Rep. Smith was a leading supporter of Roundtable-supported legislation introduced in 2021 to make permanent the 20 percent deduction for qualified pass-through business income (Section 199A). The pass-through deduction was enacted on a temporary basis as part of the Tax Cuts and Jobs Act (TCJA) in 2017. Rep. Smith also spoke at The Roundtable’s Tax Policy Advisory Committee (TPAC) in June 2016 at the height of the tax reform debate. (Smith news release, Feb. 26, 2021 and stakeholder letter of support).
  • There are only five remaining Republican members on Ways and Means who served on the panel when the TCJA was enacted. Several TCJA provisions are scheduled to expire at the end of 2025, including Section 199A and the limitation on the deductibility of state and local taxes. (Wall Street Journal, Jan. 9)

A New Agenda

House Ways and Means Committee doorway

  • On Monday, Ways and Means Chairman Smith stated, “We will build on the success of the Tax Cuts and Jobs Act and examine how our policies can reward working families with a tax code that delivers better jobs, higher wages, and more investment in America.”  He added that he would aim to use the tax code to strengthen American supply chains, encourage domestic energy production, and achieve energy independence. (Smith statement, Jan. 9)
  • On Dec. 7, 2022, Rep. Smith also discussed key priorities that should be addressed by the Ways and Means Committee with Punchbowl News. (Watch video)
  • House Republicans added 10 new members to the Ways and Means Committee on Jan. 11, and six Republican women will be part of the 25-seat majority on the panel. Subcommittee chairs will not be decided for several weeks, according to Chairman Smith. (BGov, Jan. 12)

TPAC will discuss industry tax priorities in the 118th Congress during their next meeting on Jan. 25 in conjunction with The Roundtable’s State of the Industry Meeting in Washington, DC.

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Treasury Dept. Issues New Rules on Taxation of Foreign Investment in U.S. Real Estate

Posted on by Trey Jackson

Foreign Investment in Real Property Act - book

On December 28, Treasury and the IRS released new tax regulations affecting foreign investment in U.S. real estate. 

FIRPTA

  • Among the changes, a proposed rule would repeal a long-standing private letter ruling that foreign investors have relied on when structuring inbound investments. 
  • Under current law, shareholders of domestically controlled REITs are not subject to the Foreign Investment in Real Property Tax Act (FIRPTA)—a statutory regime that subjects foreign investors to capital gains tax on their U.S. property investments. 
  • The proposal, if finalized, would expand the reach of FIRPTA by denying a REIT’s status as domestically controlled if a U.S. corporate shareholder of the REIT is foreign-owned. In other words, the rule would look through a domestic C corporation that owns the REIT, even if the C corporation is a U.S. taxpayer that pays U.S. income tax. 
  • The proposed regulation surprised foreign investors and real estate fund managers who have relied on a 2009 IRS private lettering rule, which held that a domestic C corporation that owns shares in a REIT is a U.S. owner for purposes of determining whether the REIT is domestically controlled. 
  • The proposed rule appears to conflict with policies underlying FIRPTA-related ownership attribution changes enacted in the 2015 PATH Act.  As a practical matter, the tax consequences of the proposal are retroactive because they would apply to existing investments made years ago. (Weil Tax Alert and Skadden Insights)

Additional Provisions & Regulations

Treasury Department

  • Other provisions in the proposed regulations are more favorable. For example, they include rules that allow a sovereign wealth fund to preserve the tax exemption applicable to foreign governments if the fund has only a minority, non-controlling interest in a U.S. real estate business. 
  • Simultaneously, Treasury also released final regulations last month related to the FIRPTA exemption for foreign pension funds, which the Roundtable worked to enact in 2015. The final regulations are largely positive and should facilitate even greater investment in U.S. real estate by qualified foreign pension funds. 

The Real Estate Roundtable’s Tax Policy Advisory Committee (TPAC) has created a working group to develop formal comments and respond to the recent Treasury releases.

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Ways and Means Chair Supports LIHTC in Year-End Tax Extenders Package

Posted on by Trey Jackson

House Ways and Means Chairman Richard Neal (D-MA)

Ways and Means Chairman Richard Neal (D-MA) this week expressed support for including the low-income housing credit (LIHTC) in a year-end tax extenders legislative package. (Roll Call, Oct. 25). 

Affordable Housing & LIHTC 

  • This week, Neal referred to the LIHTC in an interview with Roll Call, stating, “But for that credit, there’s a lot of housing that doesn’t get built at a time when the housing crunch is substantial across the country. I think it’s a pretty important tax vehicle. It’s demonstrated its value time and again.”
  • A 12.5% temporary increase in the annual LIHTC allocation to states enacted in 2018 expired at the end of 2021. The credit increase may be extended or further expanded when Congress returns from the midterm elections. (GlobeSt, Oct. 25 and Roundtable Weekly, Oct. 21)
  • In 2020, nearly a quarter of American renters spent 50% or more of their income on housing, according to the most recent data available from the U.S. Census Bureau. (Pew Research Center, March 23) 

Congressional Action

Affordable Housing row

  • The Roundtable-supported Affordable Housing Credit Improvement Act (S.1136 and H.R. 2573)—introduced in 2021 by Washington Democrats Sen. Maria Cantwell and Rep. Suzan DelBene—would expand the pool of tax credits, make it easier to combine LIHTC with other sources of capital like private activity bonds, and facilitate LIHTC rehab projects. (Detailed bill summary and (Tax Notes, July 21)

Beyond Legislation

Jeffrey DeBoer, Real Estate Roundtable President and CEO

  • Roundtable President and CEO Jeffrey DeBoer, above, recently stated, “Expanding the supply and availability of affordable housing deserves a coordinated local, state, and national policy action plan. Local zoning restrictions, permitting issues, and the oversized influence of NIMBYs—coupled with high and now significantly rising labor and material costs—are the true factors limiting housing supply, and in turn, increasing housing costs. Government at all levels needs to be part of the solution, not part of the problem.” (Roundtable Weekly, July 1 and July 22) 

The Roundtable’s Real Estate Capital Policy Advisory Committee (RECPAC) has formed an Affordable Housing Working Group, which is working with the Research Committee to develop proposals on expanding the nation’s housing infrastructure.  

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Congressional Lame Duck Session May Include Tax Policies Impacting Real Estate

Posted on by Trey Jackson

Capitol Dome Stormy weather

Lawmakers returning after the midterm elections for a lame duck session will work on a possible FY2023 “omnibus” budget package that may include tax policies of importance to commercial real estate. 

Omni First 

  • The first congressional priority will be a massive “omnibus” budget package that needs to pass by December 16—the deadline set by a Continuing Budget Resolution passed in September—to avoid a partial government shutdown. (Roundtable Weekly, Sept. 30)
  • Whether business tax relief—e.g. a delay in the pending phase-out of 100 percent bonus depreciation, tax extenders, or a fix to the business interest deductibility rules—will be attached to an omni package may depend on whether a bipartisan deal can be struck on child tax credit relief. (Politico, Oct. 6 and Tax Policy Center, Oct. 6)

Tax Extenders

Tax issues grid choice image

  • Certain provisions from the Tax Cuts and Jobs Act of 2017 (TCJA) recently expired, including rules related to business interest deductibility. TCJA’s 100% bonus depreciation benefit starts phasing down at the end of this year. Other expired tax provisions include a temporary increase in allocations of low-income housing tax credits (LIHTCs) to states.   

  • The Real Estate Roundtable has long supported well-designed, targeted tax incentives like the LIHTC that are aimed at boosting the construction and rehabilitation of badly needed affordable and workforce housing. (Roundtable 2022 Policy Agenda Tax Section)
     
  • House Republicans have made the permanent extension of the TCJA tax cuts a key element of their Commitment to America policy agenda. (Bloomberg, Sept. 23 and ABC News, Sept. 22) 

Packed Lame Duck 

Congress in session

  • A cascade of other national policy issues will vie for attention in the tightly packed lame duck agenda, including reauthorization of defense programs, hurricane relief, immigration, election reform, marriage equality and more. (Axios, Sept. 29)
  • House Republican Minority Leader Kevin McCarthy (R-CA) said that if the GOP controls the House in 2023, they will use raising the debt limit as leverage to force spending cuts—which could include cuts to Medicare and Social Security—and possibly limit funding to Ukraine. (PunchBowl, Oct. 18 and Bloomberg Law, Oct. 11) 

The House returns Nov. 9 and the Senate on Nov. 14.

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Real Estate Industry Urges Lawmakers to Consider Tax Incentive for Property Conversions

Posted on by Trey Jackson
CRE with green trees

A Roundtable-led coalition of 16 national real estate organizations on Oct. 12 recommended certain enhancements and expansions to the Revitalizing Downtowns Act (S. 2511, H.R. 4759). The bill was introduced by Sen. Debbie Stabenow (D-MI) and Rep. Jimmy Gomez (D-CA) to encourage the conversion of older buildings into new uses. (Coalition letter) 

Qualified Property Conversions Credit 

  • The coalition noted that many buildings are being reimagined and repurposed to address a severe shortage of housing and meet other post-pandemic business needs. Where appropriate, property conversions can be a cost-effective means to develop new housing supply, create jobs, and generate critical sources of local property tax revenue while saving energy and reinvigorating communities.

  • The Revitalizing Downtowns Act would provide a 20 percent tax credit for qualified property conversion expenditures. The credit is modeled on the historic rehabilitation tax credit and could be used for office buildings that are at least 25 years old at the time of the conversion.

  • An office-to-residential conversion project may qualify for the credit if the project provides at least 20 percent affordable housing—or is subject to an alternative affordable housing arrangement under state or local policy, ordinance, or agreement. 

Real Estate Industry Recommendations 

Denver

  • The recommendations include:
    • (a) expanding the category of properties eligible for the credit to include other types of commercial buildings, such as shopping centers and hotels;
    • (b) extending the incentive to real estate investment trusts (REITs); and
    • (c) reducing the conversion expenditure requirement from 100 percent of the building’s basis to 50 percent—along with half-a-dozen other suggestions.

  • The coalition letter is the work product of a property conversions working group created by The Real Estate Roundtable’s Tax Policy Advisory Committee. The working group has reviewed and considered the challenges and impediments confronting potential property conversion activities.  

Recent media articles on property conversions include “Cities push to convert deserted office buildings into housing” (Axios, Sept.  28) and “Multifamily Developers Turn Some Dead Office Space into Apartments” (WealthManagement.com, Oct. 4). 

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House Republicans Unveil Tax Agenda for 2023

Posted on by Trey Jackson

House GOP Announces Commitment Plan

In advance of the November midterm elections, House Republican Leader Kevin McCarthy, above, and the House GOP Conference released their Commitment to America today in Pittsburgh. The platform includes forward-looking tax and economic policy proposals that, if enacted, would impact commercial real estate in important ways. (Document and video, Sept. 23)

GOP Tax Proposals

  • The Commitment to America is the product of months of work by task forces created by the House Leader to develop a policy agenda to unify House Republicans. The tax proposals are outlined in a document entitled “Growth Through Innovation” developed by Republicans’ Jobs and the Economy Task Force. (Bloomberg Sept. 23; ABC News Sept. 22)
  • The proposals are aimed at providing more tax relief to individuals and small businesses. Proposals affecting real estate include:
    • Permanently extending 20% deduction for pass-through business income enacted in 2017,
    • Enacting additional estate tax relief for family-owned businesses, and

    • Extending rules that facilitate the full deductibility of business interest expense.
  • Other areas of focus include middle class tax relief, increasing tax incentives for R&D, bringing jobs back to the United States, and tax simplification.

TCJA Tax Cuts

Rep. Vern Buchanan (R-FL)

  • Senior Ways and Means Republican Rep. Vern Buchanan (R-FL), above, introduced legislation this week to make permanent tax cuts for individuals and small businesses enacted as part of the Tax Cuts and Jobs Act (TCJA) of 2017. The Buchanan legislation was endorsed in House Republicans’ Commitment to America released today. (Buchanan news release, Sept. 21)
  • The TCJA Permanency Act (H.R.8913) also includes several technical fixes. Without Congressional action, 23 different provisions of the 2017 Republican tax law are set to expire after 2025.

  • The current deduction for qualified business income (Section 199A) was part of the TCJA. Designed to ensure pass-through businesses received tax relief alongside the large tax cut for public corporations, the provision allows real estate and other pass-through businesses to deduct up to 20% of their net business income.”
  • Buchanan, the most senior member on the House Ways and Means Committee, is running to become the next top Republican on the powerful tax policy panel. (The Hill, April 15, 2021)

CRE Policy Webinars

Seattle skyline

Desiderio will also participate in another Sept. 28 virtual briefing on the Inflation Reduction Act’s clean energy tax incentives, hosted by the Urban Land Institute (ULI registration). The  webinar features members of The Roundtable’s Sustainability Policy Advisory Committee (SPAC)­­—Immediate Past SPAC Vice Chair Dan Egan (Managing Director, Real Estate ESG – Americas, Blackstone), Suzanne Fallender (VP Global ESG, Prologis), and ULI EVP Billy Grayson.

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