Category: Tax Policy

Roundtable Encouraging Congress to Ensure Fair Treatment of Pass-Through Businesses in Final Reconciliation Bill

Posted on by Trey Jackson
House Ways and Means Committee graphic


As negotiations continue on a multi-trillion reconciliation bill, The Real Estate Roundtable is urging lawmakers to ensure that any final agreement on tax changes treats pass-through businesses fairly and equitably.

Why It Matters

  • The reconciliation bill approved by the House Ways and Means Committee excluded several real estate-related tax proposals put forward by the Biden administration that could cause unnecessary harm to job creation, real estate values, and local communities that rely on property tax revenue. These proposals included restrictions on like-kind exchanges, repealing the step-up in basis of assets at death, and tax parity between ordinary income and capital gains. (Roundtable Weekly, Sept. 17)
  • At the same time, through the combination of several, independent tax changes aimed at upper-income taxpayers, the current reconciliation bill in the House would raise the top marginal income tax rate on many pass-through business owners from 29.6% today to 46.4% (a 57% increase). 

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  • The Roundtable believes this level of increase on pass-through businesses was unintended by Members of Congress and could undercut the bill’s own objectives of stimulating job growth, improving housing availability, and promoting investment in economically struggling communities, among other priorities.
  • See The Roundtable’s detailed summary on “Pass-Through Businesses and the Reconciliation Bill.” 

  • “Small and closely held businesses are the principal drivers of job growth and entrepreneurial activity in our economy.  The increase in the tax burden on pass-through businesses is disproportionately large relative to the tax changes for large, multinational corporations. The bill would create a historically high differential in the tax rates between pass-throughs and C corps and could put pass-through businesses at a competitive disadvantage in the economy. We do not believe this was the intent of the bill drafters,” said Real Estate Roundtable President and CEO Jeffrey DeBoer.  

  • The dramatic increase in the pass-through tax rate results in part from capping the 20% deduction on pass-through business income (section 199A).  Other changes include increasing the top tax rate on ordinary income from 37 to 39.6 percent, expanding the scope of the 3.8% tax on net investment income, and imposing a 3% surtax on incomes above $5 million.
     
  • As currently proposed, the rate differential between pass-throughs (46.4%) and C corps (26.5%) would be 20 percentage points, more than twice the level of any period over the last four decades. Real estate partnerships constitute half of the four million partnerships in the United States.

Roundtable members and others are encouraged to reach out to their Representatives and contact their Senators to urge them to preserve the 20% deduction for pass-through business income (section 199A), which is directly tied to hiring workers and investing in capital equipment and property.  Modest adjustments in the legislation would ensure that pass-through businesses will continue contributing to economic growth, innovation, and job creation. Additional information and talking points can be found here.  

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House Ways and Means Committee Advances Historic Legislation with Safety Net Expansion and $2.1 Trillion in Tax Increases

Posted on by Trey Jackson

House Ways and Means Committee graphic

The House Ways and Means Committee voted to advance legislation that would expand benefits for low-income families, invest in affordable housing and other Democratic priorities, and finance the initiatives with a $2.1 trillion tax increase that primarily falls on high-income individuals, pass-through businesses, and corporations. The legislation excludes several tax proposals put forward by the Biden administration and Senate lawmakers that would increase the tax burden on real estate. (Ways and Means news release and markup resources) 

  • Real Estate Roundtable President Jeffrey DeBoer stated, “The House Ways and Means Committee’s proposals include significant tax increases on corporations and income received by upper income taxpayers, and not on business activities like real estate.  Even so, the combined tax hikes on income received from pass-through entities could threaten job creation and business expansion. As the bill moves forward, we encourage Congress to review the suggested tax hikes, particularly those on pass-through businesses, and work to ensure that unnecessary and unintended damage is not done to the economy. Substantial commercial real estate activities are conducted by pass-through entities and these activities create jobs, support retirement savings, and boost tax revenue for critical public services provided by local governments. The Roundtable is encouraged, yet cautious, at this still relatively early stage of the legislative process. Further changes may be on the horizon, both positive and negative.” 
  • Tax issues affecting CRE are summarized in The Roundtable’s summary on Real Estate Tax Issues and Budget Reconciliation Legislation. The real estate tax issues addressed by the W&M Committee include: 

Ways and Means markup


Real Property Like-Kind Exchanges (Section 1031) 

  • The bill wisely preserves taxpayers’ ability to defer capital gain when exchanging real property for another property of like kind. 

Step-Up in Basis and Taxation of Gains at Death 

  • The bill preserves the step-up in basis that applies to appreciated gain when real estate is transferred from a decedent to an heir. The bill does not impose capital gains tax on appreciated real estate when transferred by a decedent or donor.

Capital Gains 

  • The bill increases the maximum capital gains rate from 20% to 25%. The 3.8% investment tax is maintained and extended to all taxpayers, thus making the effective capital gain tax rate 28.8%. The President’s budget proposed increasing the capital gains rate to 39.6% to create parity between the tax rate on ordinary income and capital gains.

Real Estate Carried Interest 

  • The bill generally extends from 3 years to 5 years the holding period for partnership gains attributable to a profits interest to qualify for the long-term capital gains rate. However, the bill preserves the shorter 3-year holding period for capital gain related to a real property trade or business.  The President’s budget proposed converting all carried interest income derived from a profits interest in a real estate partnership to ordinary income.

Pass-Through Business Income Deduction (Section 199A) 

  • The bill limits the maximum deduction available for pass-through business income under section 199A to no more than $400,000 for an individual and $500,000 in the case of a joint return ($2.5 million).

Net Investment Income Tax 

  • The bill would apply the 3.8% net investment income tax to income derived from a trade or business, capital gain, dividends, interest, and rental income regardless of whether the taxpayer is active or passive in the activity.

Other Tax Issues 

  • Other tax issues addressed by the committee included affordable housing, infrastructure financing, grantor trusts, deductibility of active losses and REIT constructive ownership rules. These issues are also summarized in The Roundtable’s summary on Real Estate Tax Issues and Budget Reconciliation Legislation.
  • House Speaker Nancy Pelosi (D-CA) is expected to address a provision affecting the $10,000 limit on state and local deductions (SALT) before a final bill is assembled for a floor vote. (CNBC, Sept. 15)
  • The committee’s proposals on clean energy incentives are detailed in the Roundtable Weekly story below on energy policy. 

The House is expected to try to resolve major differences between their final bill and the Senate’s version before voting on the package. Senate Majority Leader Chuck. Schumer (D-NY) has not set a formal deadline for the Senate to complete its work but he said Tuesday “there’s going to be a lot of intense discussions and negotiations over the next few weeks.” (RollCall, Sept. 14) 

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House Ways & Means Scheduled to Mark-up Revenue Measures Next Week

Posted on by Trey Jackson

Ways and Means Committee wiki

The Real Estate Roundtable continued to weigh in with lawmakers with concerns on a number of Biden administration tax proposals as the House Ways and Means Committee prepared to mark-up tax measures early next week that may potentially affect commercial real estate. 

Ways & Means Timeline 

  • Congressional committees are aiming to complete work by Sept. 15 on various portions of the massive infrastructure package, which Democrats will consider under “reconciliation” budget rules that require a simple majority to pass in the narrowly divided Congress. (Wall Street Journal, August 24)
  • Ways and Means Chairman Richard Neal (D-MA) expects to release details on his revenue proposals over the weekend. The top ordinary tax rate and the corporate tax rate are expected to be a key focus of the committee’s deliberations. (The Hill, Sept. 9)
  • Ways and Means member Stephanie Murphy (D-FL) stated this week she will vote against the committee’s measures unless more time is available to review the proposals. (CNN, Sept. 9)
  • Rep. Murphy, a moderate, said she supports the use of reconciliation to enact Democrats’ economic priorities, but at this stage, she said, “I have no choice but to vote ‘no’ on each subtitle and on final passage,” she said.  (Roll Call, Sept. 9)
  • “I don’t know how much we’re spending, how much we’re raising, how we’re spending some of the money and how we’re raising any of the money,” she said. (Murphy statement, YouTube, Sept. 9) 

Revenue Raisers 

Tax issues grid choice image

President Biden’s tax proposals that may be considered by Ways & Means include: 

Like-kind Exchanges (Section 1031) 

  • A coalition of 27 business organizations, including The Real Estate Roundtable, wrote to congressional tax-writing committee leadership on Sept. 7 about how Biden’s proposed legislative restrictions on like-kind exchanges, if enacted, would undermine the economic recovery while causing unintended and unnecessary risks to the strength and stability of U.S. real estate.
  • The coalition’s letter details how like-kind exchanges under section 1031 support jobs and investment; the health of U.S. commercial real estate and real estate markets; and the preservation of family-owned farms, ranches, and forestland.
  • Tax Notes on August 9 published an article entitled “The Tax Policy Case for Section 1031” by Roundtable Tax Policy Advisory Committee Member Don Susswein (Principal, RSM US LLP), Roundtable Senior Vice President and Counsel Ryan McCormick and Kyle Brown (Senior Manager, RSM).
  • The article addresses how like-kind exchanges increase net investment, boost state and local tax revenue, stimulate capital expenditures which leads to job growth, reduce leverage and financial risk, lower rents for households, and support healthy property values.  The article also shows how use of section 1031 also creates a ladder of economic opportunity for minority-, veteran-, and women-owned businesses and cash-poor entrepreneurs who may lack access to traditional sources of financing.
  • Advertising messages on the need to preserve section 1031 will begin running on Sept. 13 in Politico’s Morning Money. 

Pass-Through Business Income Deduction (Section 199A) 

  • More than 120 business trade associations, including The Roundtable, are part of the broad-based Main St. Employers coalition, which wrote to Ways and Means Chairman Neal on Sept. 8 about new Biden tax proposals affecting individually- and family-owned businesses. (Coalition letter)
  • The letter states, “Proposals to raise rates on pass-throughs and C corporations, cap the Section 199A deduction, increase the capital gains tax, and impose capital gains at death would raise taxes on Main Street businesses when they operate, when they are sold, and when they are passed on to the next generation.” 

Step-up in Basis and Taxation of Gains at Death 

  • A Sept. 9 letter to congressional tax-writing committee leadership from a large multi-industry trade association coalition that includes The Roundtable strongly opposed Biden administration proposals to death a taxable event for inherited assets and eliminating stepped-up basis.
  • The Family Business Estate Tax Coalition letter also cited a recent EY report that showed if stepped-up basis were repealed via carryover basis, 40,000 jobs would be lost every year in the first 10 years after enactment and GDP would decrease by $50 billion over 10 years.
  • The National Association of Realtors also weighed in on the administration’s tax proposals above in a Sept. 7 letter to leaders of the House Ways and Means and Senate Finance Committees. The letter emphasized how these the proposals could negatively impact the health of the commercial real estate market and limit the production of much-needed affordable rental housing and result in higher rent costs.
  • Policymakers are also expected to address tax issues such as raising the capital gains rate, the 3.8% net investment income tax, and carried interest, as well as tax incentives for important priorities like affordable housing and energy efficiency.  

Roundtable members are encouraged to contact the Ways and Means Committee directly about the Biden tax proposals. The Roundtable and its coalition partners expect this fall will be a critical time for decisions on national tax policy affecting CRE. 

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Tax Proposals Under Scrutiny as Timetable Moves Up for Mammoth Reconciliation Bill

Posted on by Trey Jackson

The unanticipated commitment by Speaker Pelosi to allow a stand-alone vote on the bipartisan Senate infrastructure bill no later than September 27 has scrambled the Congressional calendar and put increased attention and focus on the potential for major tax changes.

Why It Matters

  • House Leaders are urging committees, including the powerful Ways and Means Committee, to complete their work on the $3.5 trillion budget reconciliation bill by September 15.  Ways and Means Chairman Richie Neal has indicated a formal mark-up could start the week of Sept. 6 and continue 4-5 days.  (E&E Daily, Aug. 25)
  • Accelerating the consideration of the $3.5 trillion reconciliation bill may allow its supporters and advocates to retain political momentum for the massive package of social safety net, environmental, tax, and other policies—momentum that could be lost once the infrastructure bill is sent to the President.
  • The shortened timetable, however, puts pressure on lawmakers who are considering complex changes to the tax code that would normally require hearings, extended debate, and substantial vetting.  

Industry Concerns

  • The Real Estate Roundtable has raised concerns regarding a number of proposals in the President’s plan that would raise the tax burden on capital formation, undermine property values and the functioning of real estate markets, and harm the industry’s ability to create jobs and support local communities through property tax revenue.  These proposals include restrictions on like-kind exchanges, an elimination of the reduced tax rate on capital gains, and the taxation of unrealized gains at death.
  • On Tuesday, the accounting industry expressed strong concerns with the President’s proposed changes to capital income. The letter noted that, “[t]he taxation of the capital gains on gift or death in many cases would be the third time that the gain is taxed.”  Imposing immediate tax on transfers by gift or death is an unreasonable requirement when the transfers are non-liquid assets such as real estate, business interests, etc., because it may require the forced liquidation of some or all of the assets transferred,” they continued.    
  • Last Friday, the Tax Foundation challenged the Administration’s claim that their tax proposals would spare 97 percent of small businesses.  The organization analyzed the most recent IRS data and concluded the President’s proposals would reach more than half of pass-through business income (because 54% of pass-through income is earned by taxpayers making more than $500,000).
  • At the same time, lawmakers are mobilizing to ensure that the $3.5 trillion bill includes priorities such as increased investment in affordable housing.  On Thursday, 111 House Democrats led by Reps. Suzan DelBene (D-WA) and Don Beyer (D-VA) wrote to Speaker Pelosi urging that the legislation include a significant expansion of the low-income housing tax credit.

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Senate Democrats Pass Budget Resolution that Would Authorize $3.5 trillion “Human Infrastructure” Bill with Large Tax Increases

Posted on by Trey Jackson

DC monuments night

Senate Democrats voted August 11 to advance a $3.5 trillion “human infrastructure” budget resolution, which allows development of legislation that could pass later this year without any Republican support. The budget blueprint passed on a party-line vote of 50-49 the day after the Senate passed a $1.2 trillion “physical infrastructure” bill on a bipartisan basis. (BGov, Aug 11 and Roundtable Weekly, story above) 

Why It Matters 

  • The Senate budget resolution supports President Biden’s wide-ranging domestic priorities that aim to expand the federal social safety net and combat climate change. (New York Times and The Hill, Aug. 11)
  • The sprawling human infrastructure proposal would be partially financed by raising taxes on corporations and wealthy individuals – and potentially include a variety of tax increases affecting commercial real estate.
  • The Senate measure also provided instructions for various committees to craft bills under “reconciliation” budget rules. If approved by the Senate Parliamentarian, the committees’ work would be combined into final legislation that could pass on a majority vote, thereby bypassing a Republican filibuster. (Senate Democratic Memorandum, Aug. 9)
  • The House announced this week that it will return early from summer recess on Aug. 23 to consider the budget resolution. (Associated Press and CQ, Aug. 11)
  • House Speaker Nancy Pelosi (D-CA) reiterated on Aug. 11 that until the Senate finishes and passes the massive reconciliation bill, the House will not vote on the physical infrastructure legislation. Other Members of the Democratic Caucus, including Rep. Josh Gottheimer (D-NJ), co-chair of the bipartisan Problem Solvers Caucus, have called on Congressional Leaders to decouple the measures and send the bipartisan infrastructure bill to the President without delay. (Politico, Aug. 11 and The Hill, Aug. 11) 

Taxes & CRE  

Philadelphia, PA skyline

Roundtable President and CEO Jeffrey DeBoer commented on the Senate’s $3.5 trillion reconciliation bill and the tax proposals under consideration.  

  • DeBoer on Aug 11 stated, “This [reconciliation] package may be financed with a variety of tax increases affecting step-up in basis, like-kind exchanges, carried interest and capital gains that would act as a cumulative drag on investment at the exact time when sectors of the economy need incentives to recover from the pandemic. The Roundtable urges Senate and House policymakers to be very cautious as they proceed on the reconciliation bill – so that one-step forward with the physical infrastructure bill is not met with two-steps backward from tax increases.” (Roundtable statement, Aug. 11)
  • The Roundtable this week produced a summary of budget reconciliation tax issues that could directly impact commercial real estate, including: 
    • Like-Kind Exchanges
    • Capital Gains
    • Pass-through Business Income
    • Step-up in Basis and Taxation of Gains at Death
    • Carried Interest
    • Energy Efficiency Incentives
    • Affordable Housing Incentives 

Roundtable Infrastructure Town Hall 

Roundtable Infrastructure Town Hall - image capture

  • The Roundtable held an all-member Infrastructure Town Hall on Aug. 12 to discuss the Senate reconciliation measure and what it means for commercial real estate. Rep. Tom Suozzi (D-NY), a member of the tax-writing House Ways and Means Committee, center in photo,  joined Roundtable Chair John Fish, top right, Jeffrey DeBoer, top left, and other Roundtable staff for the Town Hall discussion.

The congressional debate on infrastructure is expected to extend into the fall, when policymakers face multiple other deadlines that converge on Sept. 30 – government funding for FY2022, reauthorization of funding for surface transportation programs, and reauthorization of the National Flood Insurance Program. The Roundtable is scheduled to discuss all these issues at its Fall Meeting on Oct. 5 in Washington, DC (Roundtable-level members only). 

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House Republicans Urge Biden Administration to Preserve Like-Kind Exchanges

Posted on by Trey Jackson

A group of 88 House Republicans, led by Rep. Randy Feenstra (R-IA), above, sent a letter to President Joe Biden on Aug. 3 urging him “not to damage the livelihood of farmers everywhere by repealing or changing like-kind exchanges.” ( Coalition letter and Feenstra news release)

Agriculture Sector Impact 

  • Like-kind exchanges (LKEs) allow real estate, farming, and other businesses to defer capital gain when exchanging real property used in a trade or business for property of a like kind. Like-kind exchanges also help businesses to grow organically, with less debt, by reinvesting gains on a tax-deferred basis in new and productive assets.
  • President Biden has proposed restricting the use of LKEs by limiting deferred gain in any one year to no more than $500,000 for single taxpayers and $1 million for married taxpayers. (Treasury Department’s Summary of Revenue Proposals, “Green Book” budget documents, and Roundtable Weekly, April 30)
  • The coalition of House policymakers emphasized in their Aug. 3 letter how LKEs allow farmers and other small business owners to improve their operations and invest in better income-producing properties. The letter noted that four out of five individuals who utilize these tax deferments are qualified as small investors by the IRS.
  • The letter stated, “For the agricultural community, a cap on like-kind exchanges would limit farmers’ ability to improve their operations through combining acreage, purchasing more productive land, and mitigating environmental impacts. Further, capping like­kind exchanges could make it more difficult to restructure businesses so that young or beginning farmers can join operations. Retiring farmers could be prevented from using like-kind exchanges to exchange their farm or ranch for other real estate, allowing for the next generation to take over, without depleting their life savings.”
  • The 88 policymakers also commented how the negative impact of the administration’s LKE proposal would radiate outward from individual farm owners and agricultural investors into the larger agricultural sector and the national economy at large. 

Roundtable’s Strong Support for LKEs 

  • On May 27, a broad business coalition that included The Real Estate Roundtable held a virtual briefing for members of Congress and their staff on the longstanding economic importance of LKEs – and detailed the potential negative unintended consequences of limiting section 1031. (Roundtable Weekly, May 28)
  • The briefing, moderated by Roundtable President and CEO Jeffrey DeBoer, included expert speakers and featured recent research into the macro-economic impact of LKEs. (See “The Tax and Economic Impacts of Section 1031 Like-Kind Exchanges in Real Estate” by Professor Milena Petrova and Dr. David Ling)
  • On May 18, The Roundtable and others submitted detailed comments to the Senate Finance and House Ways and Means Committees on like-kind exchanges and other pending tax issues. (Roundtable Weekly, May 21).  Additionally, in March, The Roundtable and 30 national real estate, housing, environmental, farming, ranching, and forestry organizations wrote to key policymakers to underscore the vital importance of real estate like-kind exchanges. (Roundtable Weekly, March 19)

The coalition “1031 Builds America” provides an online method for stakeholders to share their experiences with LKEs with members of Congress, and urge them to preserve Section 1031. 

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Senate Finance Committee Chair Introduces Bill to Restrict 20% Pass-through Business Income Deduction

Posted on by Trey Jackson

Senate Finance Committee Chairman Ron Wyden (D-OR), above, unveiled new legislation this week that would phase out the 20-percent pass-through business income deduction for taxpayers earning more than $400 thousand a year. (CNBC, July 21 and Wyden news release, July 20) 

  • The current deduction for qualified business income (Section 199A) allows certain taxpayers, such as sole proprietors, partners in partnerships and shareholders of S-corporations, to deduct up to 20% of their net business income.
  • The deduction was enacted as part of the 2017 Tax Cuts and Jobs Act (TCJA), which  reduced the corporate tax rate by 40%. Since the vast majority of American businesses are taxed as pass-throughs, the deduction ensured that the benefits of TCJA were more evenly distributed.

Why It Matters

  • Section 199A is currently scheduled to expire at the end of 2025. Wyden’s proposed overhaul, if enacted, would start with the 2022 tax year. (CQ and BGov, July 20 | one-page summary  | text of the bill)
  • Wyden estimated that his Small Business Tax Fairness Act could raise $147 billion in revenue, based on a Joint Committee on Taxation analysis from 2018. The Senate Finance Committee Chairman also noted that he may add the bill to the Biden administration’s $3.5 billion “human” infrastructure proposal later this fall. (Tax Notes, July 21) 

Roundtable Response 

  • The Roundtable, as part of a broad business coalition, last month expressed strong opposition to any reductions or repeal of the Section 199A deduction – including phasing it out above a certain income threshold – to the leadership of the tax-writing Senate Finance and House Ways and Means Committees. (Coalition letter, June 22 and Roundtable Weekly, June 25) 
  • The coalition’s letter emphasized how nearly 40 percent of individually- and family-owned businesses closed their doors during the COVID pandemic – and that Section 199A provided critical tax relief during that time.
  • “There are nearly two million real estate partnerships with more than 8.6 million partners in the United States,” said Real Estate Roundtable President and CEO Jeffrey DeBoer, above, in response to the new legislation. “Among other benefits, the pass-through deduction allows these real estate businesses to focus on creating jobs, investing in underserved neighborhoods, and creating productive, sustainable properties that support the local tax base. Congress should permanently extend the pass-through deduction. The proposed restrictions are a step in the wrong direction.”   

President Biden proposed phasing out the Section 199A deduction for qualified business income above $400,000 during his presidential campaign. However, that proposal was not included in his Build Back Better agenda released earlier this year or his formal budget proposal. (Tax Notes, July 21) 

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Roundtable-backed Bipartisan Bill Would Correct Condo Construction Tax Accounting Issue; Roundtable Joins Coalition Letter in Defense of Pass-Through Deduction

Posted on by Trey Jackson

residential construction condo

Two senior members of the House Ways and Means Committee introduced bipartisan legislation this week that would correct current condominium tax accounting rules.

Condo Accounting Relief

  • House Ways and Means Committee members Bill Pascrell Jr., (D-NJ) and Vern Buchanan, (R-FL) on June 22 announced the Fair Accounting for Condominium Construction Act to encourage greater housing development in high-population and high density-areas. (Pascrell news release)
  • Current condo tax accounting rules require multifamily developers of condominium 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.
  • Homebuilders of single-family homes, townhouses and row houses are not subject to this percentage-of-completion tax accounting rule restriction. As a result, current tax accounting rules discriminate against vertical condominium by unfairly accelerating federal income tax liability for new condominium construction.
  • Rep. Pascrell’s legislation would provide for an exclusion from the percentage-of-completion method for condo construction.

Roundtable Endorsement

  • Roundtable President and CEO Jeffrey DeBoer said, “The Pascrell-Buchanan legislation will modernize the outdated percentage-of-completion tax accounting rules that discriminate against condominium construction. The bill will reduce the cost of building new housing, especially in high-cost areas where greater density is needed. The Real Estate Roundtable commends the sponsors for introducing a common sense measure that, when enacted, will help expand the nation’s housing supply.” (Pascrell news release)

Section 199A Support

Sen. Ron Wyden with American flag

  • Separately, The Roundtable, as part of a broad business coalition, this week also weighed in on the 20-percent tax deduction for qualified business income (Section 199A), which was enacted as part of the 2017 Tax Cuts and Jobs Act. (Roundtable Weekly, April 2)
  • Senate Finance Committee Chairman Ron Wyden (D-OR), above, reportedly plans to propose changes to Section 199A affecting partnerships, LLCs, and other entities taxed only at the individual owner level. According to BloombergTax, Wyden’s legislation, which is still being drafted, will likely aim to start phasing out the deduction for individuals making above $400,000 in annual business income. Wyden also plans to keep the deduction in place until it is scheduled to expire at the end of 2025.
  • The business coalition’s June 22 letter to the leadership of the tax-writing Senate Finance and House Ways and Means Committees expressed strong opposition to any reductions or repeal of the Section 199A deduction, including phasing out the deduction above certain income thresholds.
  • The coalition’s letter emphasizes how nearly 40 percent of individually- and family-owned businesses closed their doors during the COVID pandemic – and that Section 199A provided critical tax relief.

The June 22 letter adds, “Proposals to limit or repeal the deduction would hurt Main Street businesses and result in fewer jobs, lower wages, and less economic growth in thousands of communities across the country. Such changes would amount to a direct tax hike on America’s Main Street employers, a key reason why the tax plan released by the White House in March left the deduction fully intact.”

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Real Estate Coalition Urges Lawmakers to Preserve Longstanding Carried Interest Tax Rules

Posted on by Trey Jackson

The need for policymakers to preserve longstanding tax law governing partnerships and profits interests – carried interest – was the focus of a June 16 letter sent by The Real Estate Roundtable and 14 other national real estate organizations to congressional tax writers. 

Pending Proposals

  • The Biden administration’s budget includes a proposal to tax carried interest as ordinary income.  The Biden proposal, as well as pending House legislation (the Carried Interest Fairness Act, H.R. 1068), would result in an enormous tax increase on Americans who use partnerships to develop, own, and operate real estate. (Roundtable Weekly, Feb. 27 and April 30)
  • The real estate coalition’s letter emphasized that the proposed changes to taxation of carried interest would:
    • Increase the cost to construct or improve real estate and infrastructure, including workforce housing, senior living communities, industrial properties or investments that support economic inclusion or bring environmental benefits; 
    • Create unintended consequences for local communities. Property taxes on real estate contribute 75 percent of local tax revenue and provide a stable and reliable source of funding for critical public services like education and law enforcement; 
    • Create new tax barriers during the post-COVID era as buildings throughout the country need to be repurposed and converted.

Reality vs. Perception

  • The industry letter to policymakers also countered the false narrative that the carried interest issue targets only a handful of hedge fund billionaires and Wall Street executives. The letter notes the following realities:
    • The IRS reports that real estate partnerships represent half of the four million partnerships in the United States. These two million partnerships and their 8.6 million partners who own and operate multifamily rental housing, office buildings, shopping centers, hotels, distribution centers, senior living communities, and other commercial real estate in every town, city, and region of the country would face damaging impacts.
    • Carried interest involves recognition of the risks a general partner takes, including the funding of predevelopment costs; guaranteeing construction budgets and financing; and exposure to potential litigation.

Retroactive Change

  • The letter also notes that current proposals would limit capital gain treatment only to taxpayers who have cash to invest. Those who invest entrepreneurial innovation, risk taking, and sweat equity would no longer receive capital gain treatment.
  • The proposals would also apply retroactively to partnership agreements executed years, often decades, earlier.  Changing the tax treatment of proposals agreed to years earlier would undermine the predictability of the tax system and discourage long-term investment that encourages economic growth, according to the letter.

The Roundtable’s Tax Policy Advisory Committee (TPAC) met June 16 during The Roundtable’s Annual Meeting to discuss the carried interest proposals and the current tax legislative landscape in Washington. 

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Real Estate Coalition Weighs In on Infrastructure Funding Options; Roundtable Addresses Tax Proposals and Like-Kind Exchanges

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The Real Estate Roundtable, along with 16 other national real estate trade organizations, submitted detailed comments to the Senate Finance Committee and House Ways and Means Committee, which held hearings this week on how to fund recent Biden Administration  infrastructure investment proposals.

Congressional Consideration

  • The coalition letter states, “As Congress considers options to pay for these investments, we urge policymakers not to erode longstanding tax rules that support job creation, capital formation and productive risk taking. Several of the tax proposals in the Administration’s infrastructure and human capital initiatives, unfortunately, would reduce real estate investment and diminish opportunities for startup businesses and those less advantaged.”
  • The comments focus on recent Biden Administration tax proposals, including:
    • Limiting taxpayers’ ability to defer gain that is reinvested in property of a like-kind;
    • Nearly doubling the tax rate on long-term capital gains;
    • Limiting capital gains treatment to invested cash and disregarding other forms of risk taken by partners; and
    • Making death a taxable event at far lower levels of income and potentially taxing the unrealized gain on appreciated assets not once but twice when an individual dies. 

Economic Impact 

Dramatic sunset over the US capitol in Washington DC
  • The letter states, “(President Biden’s) American Jobs Plan and American Families Plan offer credible initiatives to address many of our Nation’s most pressing needs, such as a modernized infrastructure, a more comprehensive approach to climate-related matters, and increased investments in housing, education, and childcare. We support aggressive steps to finance infrastructure needs, increase the supply of affordable housing, expand the economy, and promote job growth. Regrettably, some of the tax proposals accompanying the plans would reduce economic activity and opportunities and be completely counterproductive to the goals of the President’s initiatives.”
  • The coalition comments detail how the Biden tax proposals would undercut the tax base in localities throughout the country that rely on real estate taxes to finance schools, police, and other first responders. It also notes how the proposed taxes would diminish the incentive for private investment of capital in riskier real estate projects, such as affordable housing and redevelopment in struggling communities.
  • The letter also cites an April 2021 EY study commissioned by the Family Business Estate Tax Coalition, which includes The Real Estate Roundtable, that shows the impact of a specific proposal that would impose tax on transferred assets at death. The study found that repealing stepped-up basis and taxing unrealized gains at death would result in reduced job growth, lower wages, and a reduction in GDP of roughly $10 billion per-year. 

Tax Issues & LKEs 

  • Among the other industry leaders scheduled to participate in the May 25 event are the following Real Estate Roundtable Members:
  • A list of all participants is on the event website.
  • DeBoer was also quoted in Commercial Observer on May 18 on President Biden’s proposal to limit the use of Section 1031 like-kind exchanges. “Exchanges reduce the need for outside financing, leading to less leverage and debt on U.S. real estate. As a result, exchanges allow cash-strapped minority-, women- and veteran-owned businesses to grow their business by temporarily deferring tax on the reinvested proceeds,” DeBoer stated. 

President Biden’s proposals, congressional action and the industry response will be a focus of discussion at The Roundtable’s June 15 Annual Meeting and its Tax Policy Advisory Committee (TPAC) Meeting on June 16.

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