Category: Tax Policy

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

Posted on by Trey Jackson

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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Capitol Hill Lawmakers Consider Tax Measures to Finance Infrastructure and other National Priorities

Posted on by Trey Jackson

Democratic and Republican policymakers this week debated options for financing new investments in infrastructure and human capital, including tax proposals that could affect commercial real estate and incentives for capital formation.

Stepped-up Basis

  • A May 12 House Ways and Means subcommittee hearing focused on “Funding Our Nation’s Priorities: Reforming the Tax Code’s Advantageous Treatment of the Wealthy.” (Tax Notes, May 13)
  • Several hearing witnesses testified in favor of recent tax proposals to repeal stepped-up basis upon death, including a recent bill introduced by Sen. Chris Van Hollen (D-MD). (Roundtable Weekly, April 2. Van Hollen news release, March 29 and section-by-section bill explanation).
  • Concerns exist among Democrats about Biden’s tax plans, which range from eliminating stepped-up basis to raising the corporate tax rate and increasing tax rates on wealthy investors. (Washington Post, May 11 and RollCall, May 6)
  • More than a dozen House Democrats sent a May 6 letter to their leadership emphasizing how the elimination of stepped-up basis could threaten farms and family businesses. “Farms, ranches, and some family businesses require strong protections from this tax change to ensure they are not forced to be liquidated or sold off for parts, and that need is even stronger for those farms that have been held for generations,” according to the letter. [Rep. Jim Costa (D-CA) news release and Roll Call, May 6]
  • President Biden backed elimination of stepped-up basis during his campaign. (CNBC, “This is how Joe Biden will tax generational wealth transfer,” March 13, 2020 / CNBC, June 30, 2020 / ABC News, Oct. 8, 2019)
  • The Real Estate Roundtable, along with other members of the Family Business Estate Tax Coalition, recently released a report by EY’s Dr. Robert Carroll, Treasury’s former top tax economist, which found repealing stepped-up basis would result in reduced job growth, lower wages, and a reduction in GDP of roughly $10 billion per-year. 
  • The EY report, Repealing Step-Up of Basis on Inherited Assets:  Macroeconomic Impacts and Effects on Illustrative Family Businesses, concluded that, “Many family-owned businesses have value tied up in illiquid land, structures, and equipment that may need to be liquidated, or leveraged to finance loans, to pay for the new tax burden at death.”  The one-time capital gains tax could “limit[] the business’ viability as an ongoing concern.”

 Energy Tax Legislation

  • Senate Finance Committee Chair Ron Wyden (D-OR) in a May 12 statement said the committee will begin consideration this month of infrastructure and jobs legislation, starting with a markup on energy tax measures. “Following the clean-energy markup, the committee plans to consider additional key pieces of our jobs and infrastructure agenda,” according to the statement. (The Hill, May 12)
  • The Finance Committee on May 18 will hold a hearing entitled “Funding and Financing Options to Bolster American Infrastructure.”
  • Sen. Wyden last month introduced the Clean Energy for America Act, which would revamp tax incentives directed at buildings, electricity and transportation.  (Roundtable Weekly, April 30)
  • Wyden’s bill includes reforms to the 179D deduction for energy efficient commercial and multifamily buildings – with the value of the incentive increasing as more energy is conserved. (Text of the legislation, one-page summary of the bill and a section-by-section summary.)
  • A broad coalition of real estate, environmental, and manufacturing groups led by The Roundtable supports the E-QUIP Act (H.R. 2346), which proposes “accelerated depreciation” for high-performance equipment installed in commercial and multifamily buildings. The coalition is urging Senate and House policymakers to include this measure as part of any “green tax” package that may be folded into larger infrastructure spending legislation. (Roundtable Weekly, April 2)
  • Roundtable President and CEO Jeffrey DeBoer emphasized an important distinction between energy incentives affecting CRE. “The 179D incentive relies on the energy performance of an entire building, without accounting for its age or tenant usage. By contrast, E-QUIP focuses on an individual building’s components – each one capable of contributing to a reduction in overall energy consumption. The E-QUIP incentive would therefore therefore apply to all buildings more efficiently, despite their age or tenant base, and increase energy performance across all asset classes.”

Like-Kind Exchanges

  • Among the many tax issues on The Roundtable’s 2021 policy agenda is the Biden administration’s proposal to cap real estate profits that can be deferred in a 1031 like-kind exchange to $500,000.
  • On May 11, The Wall Street Journal reported on the significant impact the proposal would have on the multifamily market, which utilizes 1031 exchanges as a primary source of capital.  Additionally, the May 7 issue of Realtor Magazine focused on how the 1031 proposal could present adverse consequences for communities and their economic development.  
  • The Real Estate Roundtable, along with 30 other national real estate, housing, environmental, farming, ranching, forestry, and financial services-related organizations, wrote to key policymakers on March 16 to raise awareness of how 1031 exchanges support jobs, economic development, local communities, property taxes, and the supply of rental housing, among other benefits. (Roundtable Weekly, March 19)
  • Between 10-20 percent of all commercial real estate transactions involve a like-kind exchange. The coalition’s letter describes how like-kind exchanges under section 1031 of the tax code helped stabilize property markets at the height of the COVID-19 lockdown, and will continue to facilitate repurposing of real estate assets in the post-COVID economy. 
  • Roundtable Senior Vice President & Counsel Ryan McCormick on May 18 will discuss the economic contributions of like-kind exchanges to the U.S. economy during an Institute for Portfolio Alternatives (IPA) Summit session. 

REITs

  • Reps. Tom Suozzi (D-NY) and Darin LaHood (R-IL) on May 11 introduced the bipartisan Parity for Non-Traded REITs Act (H.R. 3123) to boost investment in commercial real estate and infrastructure. In 2015, Congress increased the amount of equity that a foreign shareholder can invest in a U.S. exchange-traded REIT to 10 percent without generating tax liability under the Foreign Investment in Real Property Tax Act of 1980 (FIRPTA).  The Suozzi-LaHood bill would extend the same 10 percent FIRPTA exemption to publicly offered but non-exchange-traded REITs.
  • “Given the current economic environment and the need for additional investment in U.S. real estate, updating existing FIPRTA rules applicable to public non-traded REITs will expand available capital, create parity with exchange traded REITS, and level the playing field for investors – thereby encouraging more foreign investment in U.S. real estate and generating economic and job growth at home,” said Rep. LaHood. (Institute for Portfolio Alternatives, May 7)

Roundtable President and CEO Jeffrey DeBoer will discuss the wide-range of tax proposals noted above, and others addressed in the organization’s 2021 policy agenda, during a May 18 Marcus & Millichap webcast, “Tax Reform: a CRE Game Changer?”

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Broad Coalition Highlights Economic, Social, and Environmental Benefits of Like-Kind Exchanges

Posted on by Trey Jackson

The Real Estate Roundtable, along with 30 other national real estate, housing, environmental, farming, ranching, forestry, and financial services-related organizations, wrote to key policymakers on March 16 to underscore the vital importance of real estate like-kind exchanges.

The letters to Treasury Secretary Yellen and the chairmen and ranking members of the congressional tax-writing committees underscore the many benefits of like-kind exchanges to the U.S. economy and the health of real estate markets. The letters also show how the exchanges improve the supply of housing, retirement security, environmental conservation and the preservation of family-owned farms and ranches. 

Why It Matters

  • Between 10-20 percent of all commercial real estate transactions involve a like-kind exchange.  The coalition letters describes how like-kind exchanges under section 1031 of the tax code helped stabilize property markets at the height of the COVID-19 lockdown, and will continue to facilitate repurposing of real estate assets in the post-COVID economy.
  • The letters provide supporting data showing how like-kind exchanges allow businesses to grow by reinvesting gains on a tax-deferred basis in new and productive assets. 
  • Like-kind exchanges create a ladder of economic opportunity for minority-, veteran-, and women-owned businesses and cash-poor entrepreneurs that may lack access to traditional sources of financing, according to research referenced in the letters.

Groundbreaking Research:

  • The letters highlight original research by Professors David Ling (Univ. Fla.) and Milena Petrova (Syracuse U.) on the economic impact of like-kind exchanges.  The study commissioned by The Real Estate Roundtable and other organizations was published in two installments in the peer-reviewed Journal of Real Estate Literature here and here and more recently updated with current data.

  • The academic studies have found that exchanges spur capital expenditures, increase investment, create jobs for skilled tradesmen and others, reduce unnecessary economic risk, lower rents, support property values, and generate substantial state and local tax revenue.
  • Roughly 40 percent of like-kind exchanges involve rental housing.  The coalition emphasized in its letter that section 1031 is an important source of capital for affordable and workforce housing. Farmers and ranchers use like-kind exchanges to combine acreage, acquire higher-grade land, mitigate environmental impacts, and otherwise improve operations.  Land conservation organizations rely on exchanges to preserve open spaces for public use or environmental protection.

The Roundtable’s Tax Policy Advisory Committee (TPAC) will continue working to raise awareness of the role that like-kind exchanges play in supporting the health and stability of U.S. real estate and real estate markets. 

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New Bills Would Help Offset COVID-Prevention Workplace Expenses and Permanently Extend 20% Pass-Through Deduction; Industry Seeks Cost Recovery Transition Relief for Rental Housing

Posted on by Trey Jackson

Downtown Houston, Texas

Two recently introduced legislative proposals supported by The Real Estate Roundtable would address issues important to commercial real estate. The Healthy Workplaces Tax Credit Act  would provide a new tax credit for business owners’ expenses associated with reducing the risk of COVID-19 in the workplace. The Main Street Tax Certainty Act would permanently extend the 20% pass-through business income deduction enacted in 2017.  Separately, a coalition of real estate organizations, including The Roundtable, urged Treasury this week to provide guidance allowing property owners to fully benefit from legislation enacted in December that clarified the cost recovery period for rental housing.

Healthy Workplaces Tax Credit

  • On March 2, Sens. Rob Portman (R-OH) and Kyrsten Sinema (D-AZ) introduced the bipartisan Healthy Workplaces Tax Credit Act. (See one-page summary)
  • The bill includes several measures that would help businesses reopen safely, while ensuring employee and customer confidence, by providing:
    • a refundable tax credit against payroll taxes for 50 percent of the costs incurred by the business for COVID-19 testing, PPE, disinfecting, extra cleaning, reconfiguring workspaces, and employee education and training until the end of the year; and
    • an income tax credit for expenditures made to reconfigure work spaces last year (March 13, 2020- December 31, 2020)
  • Chip Rogers, president and CEO of the American Hotel & Lodging Association, stated, “The Healthy Workplace Tax Credit is critical legislation for industries like ours, to help offset these significant, but necessary operating costs at a time when hotel revenues remain down 40% or more across the country.” (Sen. Portman news release, March 2, 2021)
  • A broad business coalition, including The Real Estate Roundtable, urged Congress last July to pass a “healthy workplaces” tax credit as part of coronavirus relief. (Coalition letter,  July 16, 2020 and Roundtable Weekly  July 17, 2020).   Sen. Portman originally introduced a Healthy Workplaces Tax Credit bill on July 20, 2020.

20% Deduction for Pass-Through Business Income (Section 199A)

  • Last week, Members of Congress in both the House and Senate introduced legislation to extend permanently the 20 percent deduction for qualified pass-through business income permanent. The bills are strongly supported by more than 80 stakeholder groups, including The Real Estate Roundtable. (Rep Jason Smith news release, Feb. 26)
  • Sen. Steve Daines (R-MT), Rep. Jason Smith (R-MO), and Rep. Henry Cuellar (D-TX) introduced the Main Street Tax Certainty Act to support small businesses, help create jobs and strengthen the economy. Without congressional action, the deduction will expire at the end of 2025.
  • In a February 26 letter to the leadership of the Senate Finance and House Ways and Means committees, The Roundtable and other stakeholders stated that making the section 199A deduction permanent would provide certainty to small businesses affected by the COVID-19 pandemic. (Tax Notes, March 1)

Real Estate Industry Requests Rental Housing Cost Recovery Guidance

  • On March 2 a coalition of real estate industry organizations requested the Treasury Department and IRS issue guidance that would allow taxpayers to automatically change their method of accounting in order to benefit from the technical correction to the rental housing recovery period that was in the end-of-year omnibus spending bill enacted in December (Roundtable Policy Alert, Dec 22, 2020)
  • The 2020 law clarified that properties placed in service before 2018 are eligible for the new 30-year cost recovery period under the Alternative Dispute System (ADS).
  • The industry letter was led by the National Multifamily Housing Council and joined by The Real Estate Roundtable, International Council of Shopping Centers, Nareit, and others.
  • The letter also requests transition relief that would allow real estate partnerships to file amended returns to opt out of the limitation of business interest deductibility now that the penalty for opting out is a 30-year cost recovery period, rather than the prior 40-year ADS recovery period.

The Roundtable and its Tax Policy Advisory Committee (TPAC) will continue to work with policymakers in Congress and regulatory agencies on the fair and equitable tax treatment of real estate.

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Legislation Reintroduced in the House to Change Taxation of Carried Interest

Posted on by Trey Jackson

A group of House Democrats led by Bill Pascrell Jr. (D-NJ), chairman of the House Ways and Means Oversight Subcommittee, introduced the Carried Interest Fairness Act of 2021 (H.R. 1068) on Feb. 16. For taxpayers with a profits interest in a partnership that invests in capital assets, such as stock and real estate, the bill would convert long-term capital gain to ordinary income. (Pensions & Investments and Bisnow, Feb. 16)

  • As currently drafted, the House legislation would apply to dispositions of partnership interests, distributions of partnership property, and sales of partnership assets that occur in tax years ending after the date of enactment. Thus, if the bill became law this summer or fall, and a partnership’s tax year corresponded with the calendar year, the tax increase would apply to gains realized after December 31, 2020. There is no provision that would exempt or grandfather prior partnership agreements, even though the agreements were negotiated based on well-settled tax law as it existed at the time.
  • The top individual income tax rate today is 37%. The current maximum tax rate on long-term capital gain is 20%.  In some cases, an additional 3.8% tax on net investment income also applies. 
  • The six co-sponsors of H.R. 1068 are Reps. Reps. Don Beyer (D-VA), Earl Blumenauer (D-OR), Judy Chu (D-CA), Andy Levin (D-MI), Katie Porter (D-CA) and Tom Suozzi (D-NY). (Rep. Pascrell news release, Feb. 16).  Similar legislation has been introduced in every Congress since 2010.
  • In the Senate, incoming Finance Committee Chairman Ron Wyden (D-OR) outlined his tax agenda during a Jan. 13 call with reporters, including plans to move forward with an increase in the corporate tax rate and major changes in the taxation of individual capital gains. Wyden added he would also pursue raising the current 21% corporate tax rate and change the tax treatment of carried interest (Roundtable Weekly, Jan. 15).
  • During the Presidential campaign, then-candidate Joe Biden did not put forward a carried interest proposal, but rather proposed raising the maximum tax rate on long-term capital gains to create rate parity with wages, rental income, and other sources of ordinary income. 

The Roundtable & Carried Interest

  • The Roundtable has consistently opposed proposals to tax all carried interest at ordinary income rates. Congress likewise has consistently rejected proposals to recharacterize all profits interests as ordinary income. Carried interest is not compensation for services.  General partners receive fees for routine services like leasing and property management.  Those fees are taxed at ordinary tax rates.  The carried interest is granted for the value the general partner adds to the venture beyond routine services, such as business acumen, experience, and relationships.  It is also recognition of the risks the general partner takes with respect to the general partnership’s liabilities, such as predevelopment costs and potential litigation. 
  • “Taxing carried interest at ordinary income rates would discourage the risk taking and sweat equity that drives job creation and economic growth,” said Roundtable President and CEO Jeffrey DeBoer. “It would encourage real estate owners to borrow more money to avoid taking on equity partners, and it would make it more expensive to build or improve real estate and infrastructure, including workforce housing, assisted living communities, and industrial properties, to name just a few. Some development simply won’t happen, especially in long-neglected neighborhoods or on land with potential environmental contamination,” DeBoer added.
  • The Tax Cut and Jobs Act of 2017 created a 3-year holding period requirement for carried interest to qualify for the long-term capital gains rate.

As Congress considers additional economic recovery legislation, The Roundtable and its Tax Policy Advisory Committee (TPAC) will continue working with policymakers, including the Congressional tax-writing committees, to preserve and improve tax rules that promote capital formation and the appropriate treatment of entrepreneurial activity and productive risk-taking.   

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