Category: Tax Policy

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?”

#  #  # 

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. 

#  #  # 

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.

#  #  # 

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.   

#  #  # 

Bipartisan Legislation Allowing REITs to Increase Investment in Commercial Tenants Introduced

Posted on by Trey Jackson

Downtown Salt Lake City, Utah

Bipartisan legislation introduced Feb. 4 by House Ways and Means Members Brad Schneider (D-IL) and Darin Lahood (R- IL) would modernize real estate investment trust (REIT) tax provisions to permit REITs to invest equity in struggling commercial tenants that have been harmed by the COVID-19 pandemic. (News release, Feb. 4)

  • The Retail Revitalization Act of 2021 (H.R. 840) – strongly supported by The Roundtable and a coalition of real estate, retail, and labor interests – would help address the challenges in the retail sector that have been exacerbated by the coronavirus. Failure to make these changes could result in further retail bankruptcies, liquidations of retail businesses, large-scale job losses and a collateral impact on related supply chains that service the sector.   
  • “The COVID-19 pandemic has decimated the retail sector, resulting in lost jobs and shuttered doors. Retailers across the county are already facing bankruptcy, liquidation or large-scale job losses. Allowing REIT landlords to infuse more capital into their retail tenants will help offset the retail sector’s devastating losses caused by the pandemic and save jobs,” said Rep. Schneider.
  • Rep. Lahood added, “Retailers need more funding as they work to recover from the pandemic and this legislation will help infuse critical private capital into small businesses struggling.”
  • Roundtable member Brian Kingston, CEO of Brookfield Property Group commented, “As one of the largest shopping mall owners in the U.S., we have seen first-hand the devastating effects the pandemic has had on many of our tenants.  A modernization of the REIT rules—like those contained in the Retail Revitalization Act—will allow us to respond to our tenants request for further assistance, in turn allowing them to keep their doors open, save thousands of jobs, and continue to generate millions in tax revenue for federal, state, and local governments.”
  • The bill would modify existing related-party rent rules that treat rental income received by a REIT from a tenant in which the REIT owns more than a 10 percent interest as bad income for REIT purposes.  Specifically, among the changes, the bill would:
    • increase the capacity of a REIT to own the equity of a tenant from 10% to 50%, and
    • conform the ownership attribution rules used for determining what is considered related-party rent under the REIT rules to the general ownership attribution rules that apply to corporations.

Speaking at a virtual event with the sponsors and stakeholders on the day of introduction, Roundtable President and CEO Jeffrey DeBoer said, “[A]s important and helpful as Congress’s actions have been for smaller businesses, a lifeline is now needed, particularly to larger retail businesses and the people who work in the retail industry.”

“The legislation is not a tax cut or a tax break,” DeBoer continued, “It is very much a private sector solution.  It would provide a legal framework for property owners … to put their own capital at risk by making equity investments in struggling retail businesses that employ tens of thousands of workers nationwide.”  

#  #   #  

House Ways and Means Democrats Release Legislative Framework, Senate Finance Chairman Ron Wyden Will Pursue Capital Gains Changes

Posted on by Trey Jackson

Congressional tax-writing committees this week began unveiling their agendas for the 117th Congress, with Democrats poised to control the majority in the both House and Senate. [Photo: Senate Finance Chairman Ron Wyden (D-OR), left, and House Ways and Means Chairman Richard Neal (D-MA), right]

  • In the House, Ways and Means Committee Chairman Richard Neal (D-MA) on Jan. 11 released a 14-page legislative framework describes an agenda to address health and economic inequities in the United States, particularly those rooted in racial disparities. (Ways & Means news release, Jan 11)
  • The framework, entitled “A Bold Vision for a Legislative Path Toward Health and Economic Equity,” lays out the pillars and policy priorities that will steer the committee’s work in the new Congress.  The economic proposals focus on economic justice for workers, economic justice for children and families, retirement security, investment in communities, and environmental justice.
  • The committee’s staff report, “Something Must Change: Inequities in U.S. Policy and Society,” provides key context about committee members’ legislative priorities.
  • Specific proposals in the legislative framework include increasing the supply of affordable housing through the low-income housing tax credit; providing enhanced bond incentives to state and local governments to address environmental stressors; and expanding tax credits for families with children, child care expenses, higher education costs, and more.  
  • Chairman Neal writes in his foreword, “The framework we present here is Ways and Means Committee Democrats’ plan to make our nation a more just and equitable place. Some actions we can pursue almost immediately. Other advancements may take longer to become law. But inaction is not an option. Complacency cannot be tolerated.”

Senate Finance Committee

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 presented and released a detailed white paper outlining his plan to reform the taxation of capital gains in September, 2019.  (News Conference Video, Center for American Progress Action Fund, Sept. 12, 2019)
  • His proposal, entitled “Treat Wealth Like Wages,” would raise the top tax rate on capital gains (currently 20%) and create parity with the tax rate on wages and other ordinary income.  In addition, his plan would impose annual mark-to-market taxation of capital assets for taxpayers above certain income thresholds.  Both proposals represent dramatic departures from existing tax law. 
  • During this week’s press call, Wyden said, “If you are a nurse in America taking care of COVID patients, you don’t get to defer paying your taxes. If you’re a billionaire, you can defer, defer and defer some more and then pretty much never pay any taxes at all.” 
  • A mark-to-mark system would require taxpayers to pay tax on the annual appreciation of capital assets – regardless of whether the property has been sold and cash is available to pay the levy – or impose a “look-back charge” on illiquid assets when a sale occurs or certain revaluation events take place. It could greatly diminish the incentive to start a busines or invest in any asset with a long, productive life. Such a dramatic change in the basic rules for how capital is taxed could have severe unintended consequences for future economic growth and job creation. ( Roundtable Weekly, Sept. 13, 2019)
  • Wyden added he would also pursue raising the current 21% corporate tax rate and change the tax treatment of carried interest.
  • Any tax changes in the Senate will have to advance through a 50-50 chamber. How committees will work through their arrangements and procedures has yet to be determined by Senate Majority Leader Chuck Schumer (D-NY) and Minority Leader Mitch McConnell (R-KY) 
  • More details related to Senate and House leadership positions and their respective committees can be found on JDSupra’s “Welcome to the 117th Congress” (Jan. 8).

Sen. Ron Wyden is scheduled to speak with Roundtable members at the organiation’s upcoming State of the Industry business meeting on Jan. 26. Additionally, The Roundtable’s Tax Policy Advisory Committee meeting will address the 117th Congress’ tax agenda on Jan. 27 (all virtual).

#   #   #

Treasury Department Finalizes Regulatory Projects on Carried Interest, Deductibility of Business Interest

Posted on by Trey Jackson

Treasury Department x475

Treasury Department officials are working overtime to complete several multi-year tax regulatory projects before handing authority over to the new Biden Administration. These rules largely relate to the implementation of the Trump Administration’s signature legislative accomplishment, the Tax Cuts and Jobs Act of 2017. 

  • The recently finalized regulations address carried interest and the deductibility of business interest.
  • The IRS on Dec. 29 issued a final revenue procedure (Rev. Proc. 2021-9) creating a safe harbor for senior housing to qualify for an exception to the new limitation on the deductibility of business interest. The statutory exception is available to a “real property trade or business.” Uncertainty regarding whether an assisted living facility would qualify as a real property trade or business has hung over the senior housing industry since the legislation’s enactment. The new revenue procedure puts those lingering concerns to rest and clarifies that senior housing qualifies for the exception, as long as certain requirements are met.
  • In addition, Treasury released supplemental, final regulations on the deductibility of business interest this week.  The rules address changes made in the CARES Act, as well certain transition relief for partnerships (T.D. 9943)
  • The long-awaited carried interest final regulations implement the new three-year holding period requirement for carried interest to qualify for the long-term capital gains preference (T.D. 9945). 
  • The final carried interest regulations address several comments submitted by The Real Estate Roundtable. Roundtable comments aimed to ensure the rules are consistent with legislative intent of the provision (Oct. 5, 2020 comment letter). 
  • Specific improvements in the final carried interest rules provide greater flexibility for a general partner to finance an equity interest in a partnership with a loan from other partners in the partnership. The final rules also clarify that the three-year holding period does not override other provisions of the tax code that treat certain transactions as nontaxable events. 
  • Proposed regulations still outstanding include tax rules related to the transition away from LIBOR as a reference rate in mortgages and other financial contracts (Roundtable Weekly, Oct. 11, 2019).

The Roundtable’s Tax Policy Advisory Committee (TPAC) will discuss these regulatory efforts in detail on January 27 in conjunction with The Roundtable’s State of the Industry Meeting (all virtual).

#  #  #

Treasury Department Clarifies that Partnership-level State and Local Income Taxes are Deductible

Posted on by Trey Jackson
IRS building in Washington DC

The Treasury Department and IRS in a recent notice indicated their intent to issue proposed regulations clarifying that state and local income taxes imposed on, and paid by, a partnership or an S corporation are deductible in computing the partnership or S corporation’s taxable income.  (IRS Notice 2020-75) 

  • The announcement has important implications for real estate and other businesses operating in States with high state and local income tax burdens.  The Tax Cuts and Jobs Act of 2017 limits taxpayers’ ability to deduct state and local taxes (SALT) paid at the level of the individual taxpayer to no more than $10,000. 
  • The SALT limitation in TCJA applies to state and local taxes owed on individual wages, as well as state and local taxes paid on business income distributed to partners or S corporation shareholders.  In contrast, state taxes on corporate income remained deductible under the 2017 legislation.  However, prior to Notice 2020-75, it was unclear whether the SALT limitation applied to entity-level income taxes imposed on, and paid directly by, a partnership or S corporation.   
  • The Treasury announcement is an important step towards creating a more level playing field between publicly held C corporations and privately held pass-through businesses.   
  • Over the last three years, several States have modified their tax laws to allow partnerships, S corporations, and LLC’s to pay tax on their business income at the entity level.  States adopting an entity-level tax on pass-throughs include Connecticut, Louisiana, Maryland, New Jersey, Oklahoma, Rhode Island, and Wisconsin.  In most cases, the regimes are elective.  (CNBC, Nov. 18) 
  • Uncertainty about the federal tax treatment of these regimes has limited their effectiveness.  That could change quickly with the new Treasury guidance.  Similar legislative proposals are pending in Alabama, Arkansas, Michigan, and Minnesota and more may follow in light of Treasury’s clarification.  Entity-level regimes that comply with the Treasury regulations could help restore SALT deductions for a significant share of pass-through business income. 

Other tax and economic policy issues affecting real estate were addressed this week in a CBRE panel discussion that featured Roundtable Senior Vice President and Counsel Ryan McCormick and other industry experts. (video)

#  #  # 

Roundtable Commends Aspects of Proposed Carried Interest Regulations While Recommending Further Clarifications and Improvements

Posted on by Trey Jackson

The Real Estate Roundtable on Oct. 5 submitted detailed comments to the Treasury Department and IRS on proposed regulations implementing the 3-year holding period requirement for carried interests to qualify for long-term capital gain treatment.  (Roundtable comment letter)

  • Treasury on July 31 released the proposed rules under IRS Section 1061 to address the specific conditions that apply to the 3-year holding period requirement passed by Congress in the Tax Cuts and Jobs Act (TCJA) of 2017.  (Roundtable Weekly, Aug. 7)
  • The Roundtable commended the agencies for a balanced approach on certain key issues addressed in regulations – yet recommended further clarifications and improvements to the proposed rules to retain the original intent of Congress.  
  • The Roundtable’s comments note that the IRS rules include a number of well-designed provisions that should help avoid unintended consequences when the 3-year holding period is implemented, including:

—  The 3-year requirement is limited to the gain from a sale or exchange of a capital asset – and excludes gain from property used in a trade business (Section 1231 gain). 

—  A useful “look-through” rule to help ensure REIT dividends paid to shareholders receive the same long-term gain treatment that would apply to assets owned individually or in partnership form.

—  A sensible exclusion to ensure a partner’s own capital contributions to the partnership are not subject to re-characterization under section 1061.

Recommendations for Additional Clarifications and Improvements

The Roundtable comment letter also recommends certain changes to the proposed regulations to bring the rules more in line with the legislative intent when Congress enacted section 1061.  The Roundtable recommendations include the following:

  • Provide a safe harbor to allow funds borrowed by a general partner to qualify as a capital interest in the partnership.  Investors frequently require a general partner to co-invest in the partnership to align the parties’ interests.  These co-investments often are financed with loans from the investors.  The proposed regulations would undermine the economics of these arrangements. The 3-year holding period would apply when an investment is made with funds borrowed from the other investors in the partnership.  The Roundtable recommends that the Treasury narrow the broad restriction on borrowed funds by creating a safe harbor for non-abusive situations.
  • Prevent improper acceleration of tax liability when a partnership interest is transferred in a nonrecognition transaction.  Section 1061(d) creates certain tax consequences for transfers of partnership interests to related parties.  The proposed regulations broadly interpret section 1061(d) to override other nonrecognition provisions in the tax code by requiring the inclusion of gross income as a result of such transfers.  The Roundtable recommends that Treasury narrow its current interpretation of the provision to avoid accelerating tax liability in the case of transfers of partnership interests to related parties in nonrecognition transactions.
  • Avoid casting too broad a net on partnerships covered by the 3-year holding period.  Congress limited section 1061 to partnership interests in businesses that raise or return capital on a regular, continuous, and substantial basis.  The proposed rules, however, largely disregard this prong of the test and could capture many real estate arrangements unintended by lawmakers, including joint ventures, operating partnerships, and others.  The Roundtable recommends that Treasury limit application of the provision to businesses that meet the statutory requirements. 

Roundtable President and CEO Jeffrey DeBoer concludes the letter by noting, “Congress . . . narrowly drafted section 1061 to apply to specific situations.  Our comments our aimed at preserving the drafters’ intent while avoiding unnecessary disruption to common, everyday real estate partnerships—small and large—throughout the country.”

The recommendations were developed by The Roundtable’s Tax Policy Advisory Committee (TPAC).

#  #  # 

IRS Proposes Favorable New Rules for Like-Kind Exchanges

Posted on by Trey Jackson
IRS building in Washington DC

The IRS on June 11 released proposed regulations for like-kind exchanges under section 1031 that implement changes enacted in the Tax Cuts and Jobs Act (TCJA) of 2017.  TCJA restricted section 1031 to exchanges of “real property.”  The proposed rules would provide a favorable definition of “real property” and establish a safe harbor for certain personal property received in an exchange. 

  • Like-kind exchange rules allow taxpayers to defer capital gains tax when they exchange property held for investment or business use for another property of a “like kind.”  
  • Ryan McCormick, senior vice president and counsel at The Real Estate Roundtable, described in Bloomberg  Tax (June 11) why real estate like-kind exchanges are critical in the current environment: “Like-kind exchanges are even more important during periods of economic stress, like today, when traditional financing is less reliable.”
  • TPAC Member Richard Lipton (Baker McKenzie LLP) noted favorable aspects of the proposed rules, “It’s a very broad definition and many practitioners will be happy with the inclusion of inherently permanent structures being broadly defined, and also the inclusion of certain intangible property,” Lipton said.  (Bloomberg Tax, June 11).
  • Under TCJA, items like machinery, equipment, vehicles, artwork, collectibles, and patents no longer qualify for deferral under section 1031, but exchange treatment remains available for real property, including “land and generally anything built on or attached to it.” (IRS New Release 2018-227, Nov. 19, 2018).

The proposed rules appropriately treat licenses, permits, and other rights that derive their value from real property as eligible assets.  The regulations also provide a helpful safe harbor for incidental personal property (up to 15% of the aggregate value of the replacement property) that is typically transferred, in standard commercial transactions, with the real property.  (Federal Register, June 12, Statutory Limitations on Like-Kind Exchanges)

Like-Kind Exchange Deadlines

Like-kind exchanges must meet strict deadlines to qualify for deferral.  The pandemic has greatly complicated the ability to complete an exchange.  The reasons include: stay-at-home orders, flight restrictions, an inability to visit sites or perform appraisals, the closure of local governmental offices, and a general inability to conduct the necessary due diligence. 

  • In March, The Roundtable and other real estate organizations requested an extension of 1031 deadlines.  (Coalition LKE letter, March 23)
  • The Treasury Department in early April extended the 45-day deadline for identifying like-kind exchange replacement property and the 180-day deadline to close on a like-kind exchange transaction until July 15, 2020.  (IRS Notice 2020-23)
  • “It seemed like a good-government, reasonable thing to do,” The Roundtable’s Ryan McCormick recently told The New York Times.  Real estate investors could not travel because of pandemic lockdowns and completing due diligence steps such as an appraisal became difficult, if not impossible. “Taxpayers were seeking some additional time to work through that,” McCormick told the Times.  (The New York Times, June 5)
  • An industry coalition, including The Real Estate Roundtable, on April 20 wrote to the Treasury Secretary seeking further clarification and relief on 1031 deadlines.  (Coalition letter, April 20, 2020)

The Roundtable’s TPAC will review the June 11 proposed regulations and comment on any further like-kind exchange issues that may need clarification. 

TPAC Video Discussions

TPAC held its first remote meeting in conjunction with The Roundtable’s Annual Meeting on June 12.  Wide-ranging TPAC discussions touch on recent social unrest; the COVID-19 pandemic and the CARES Act; partnership audit reform;  section 199A;  like-kind exchanges, COD income; energy-efficiency incentives; REIT related party rules; section 163(j); and much more. TPAC recordings on The Roundtable’s YouTube channel include:

#  #  #