Category: Tax Policy

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.”  

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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).

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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).

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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)

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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).

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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:

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IRS Grants REITs Pandemic Relief; Lawmakers Challenge Tax Rules for PPP Loans and Request Greater Flexibility for Opportunity Zones

Posted on by Trey Jackson

Several tax policy issues affected by the coronavirus pandemic were the focus of policymakers’ attention this week in Washington, including:

Regulatory Relief for REITs

  • The IRS on March 4 granted relief with respect to distributions that publicly traded REITs must make to their shareholders in order to retain their single-level, preferred tax treatment.   The new guidance temporarily lowers the minimum percentage of shareholder dividends from these investment vehicles that must be made in cash from 20% to 10%.   The agency granted similar relief during the 2008 financial crisis.   
  • IRS Revenue Procedure 2020-19 is effective for distributions made by REITs on or after April 1, 2020 and on or before December 31, 2020.  According to the IRS, the guidance was issued to enable REITs to conserve capital and thereby enhance their liquidity.
  • Nareit wrote to the Treasury Department on March 8 seeking the change.  “The current COVID-19 has significantly impacted all REITs, but most severely in the lodging, retail, and health care sectors.  Many REITs have reduced their dividends because the rents they expect to receive are declining dramatically because of the restrictions put in place or suggested by federal and state authorities,” according to Nareit’s letter. 

Congress Challenges Treasury on Tax Aspects of PPP Loans

  • Congressional leaders are questioning a recent notice from the IRS prohibiting taxpayers from deducting business expenses paid with loans from the $670 billion Paycheck Protection Program if the loans are subsequently forgiven (see IRS Notice 2020-32, April 30).
  • The chairmen of the House and Senate tax-writing committees sent two letters this week to Treasury Secretary Steve Mnuchin urging him to reconsider the Department’s interpretation, which significantly reduces the economic benefit of the loan forgiveness for the borrower.  

  • House Ways and Means Chairman Richard Neal (D-MA), Senate Finance Chairman Chuck Grassley (R-IA) and Sen. Ron Wyden (D-OR), the Finance panel’s top Democrat, wrote that Treasury and the IRS’ position defies lawmakers’ intentions when they passed the CARES Act.  “We believe the position taken in the Notice ignores the overarching intent of the PPP, as well as the specific intent of Congress to allow deductions in the case of PPP loan recipients,” the lawmakers stated in their letter to Sec. Mnuchin. 
  • Yesterday, Treasury responded to the lawmakers’ May 5 letter, acknowledging the agency guidance (Notice 2020-32), and that it would “follow up” with Grassley’s office on the matter.  
  • Additionally, Sen. John Cornyn (R-Texas) on May 6 led a group of Senators in introducing the Small Business Expense Protection Act, which would clarify the PPP so small businesses can deduct expenses paid with a forgiven PPP loan from their taxes. 

Covid-19 Relief for Opportunity Zones

  • Sen. Tim Scott (R-SC) and eight other Senate Republicans wrote to Treasury Secretary Mnuchin  and IRS Commissioner Rettig on May 4 asking Treasury Department and the IRS to consider several regulatory recommendations aimed at providing flexibility to Opportunity Zone businesses and investors in response to the coronavirus pandemic.   
  • National estimates show approximately $67 billion has been pledged towards investments in Opportunity Zones, with $10 billion in equity already raised.  (Sen. Scott news release.  May 4)    
  • The Senators are encouraging 10 specific changes in their letter, which states, “Significant challenges arise from the inability to raise capital; decreased demand for space, products and services; a decline in the local economy; governmental delays; supply chain interruptions; and uncertainty regarding valuations and ability to secure loans and necessary funding apart from Opportunity Zone capital gain investments.”
  • The May 4 letter continues, “Relief focused on giving stakeholders, projects, and businesses additional time and flexibility to meet Opportunity Zone requirements, timelines, and thresholds will enable Opportunity Zone businesses to weather the storm and be part of the robust post-COVID economic recovery.” 

The Roundtable continues to be a strong supporter of the Opportunity Zones program as a powerful catalyst for transformational real estate investment in designated low-income areas.

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Roundtable Video Alert Focuses on Tax Policy Pandemic Responses and Priorities; Industry Asks Treasury to Clarify Like-Kind Exchange Deadlines

Posted on by Trey Jackson

The Real Estate Roundtable on Tuesday released a video alert focused on tax policy efforts aimed at mitigating the COVID-19 pandemic’s economic impact on commercial real estate.  

  • Roundtable President and CEO Jeffrey DeBoer, above, introduces the video with a report on the organization’s various policy efforts related to emergency financing, including the Payroll Protection Program (PPP) and the Federal Reserve’s credit lending facilities, such as the Term Asset-Backed Securities Loan Facility (TALF) – before delving into tax policy with Roundtable Senior Vice President and Counsel Ryan McCormick.
  • McCormick describes recent actions the Treasury Department and the Internal Revenue Service have taken to provide relief and ease cash flow challenges for taxpayers, including real estate businesses and their tenants, and shares insight on remaining COVID-19-related tax priorities.
  • The discussion highlights new Treasury guidance permitting partnerships to file amended tax returns, thus allowing partnerships to benefit from retroactive provisions in the CARES Act, including the shorter depreciation period for improvements to nonresidential property.  Other issues include new guidance allowing real estate businesses to revoke prior elections under the business interest limitation.  The Roundtable had urged both actions to ensure that the tax relief in the CARES fully extends to commercial real estate and its tenants.  (Roundtable Weekly, April 10)
  • The video alert also addresses the administrative relief related to tax deadlines for like-kind exchange transactions and opportunity zone investments – along with added flexibility for mortgage servicers’ to modify loans in mortgage-backed securities (REMICs) without triggering tax liability. 
  • Remaining tax policy priorities for The Roundtable include relief that would allow private parties to restructure existing loans through debt workouts and restructurings without generating cancellation of indebtedness (COD) income – (see Roundtable COD letter, March 20) – as well as greater flexibility under the tax law for REITs to take an economic interest in a struggling commercial tenant to help avoid business closures and layoffs.”  
  • This week’s video discussion is the third of several Roundtable video reports addressing the COVID-19 economic crisis.  Other resources, including related policy comment letters, are available on the organization’s website.  (The Roundtable’s COVID-19 Resource Center).   

Like-Kind Exchange Deadline Clarification

An industry coalition, including The Real Estate Roundtable, on April 20 wrote to Treasury Secretary Steven Mnuchin seeking further clarification and relief on deadlines affecting real estate like-kind exchanges.  (LKE policy comment letter, April 20)

  • The letter requests that Treasury or the IRS clarify that recently issued IRS Notice 2020-23 did indeed initiate the 120-day extension of like-kind exchange deadlines that is part of the 2018 revenue procedure that applies to declared disasters.
  • At a minimum, Notice 2020-23 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 (if the deadline otherwise would have occurred between April 1 and July 14).
  • However, relief associated with prior disasters provided 120-day deadline extensions that were retroactive to the date of the disaster declaration.  The IRS may have intended to grant the full 120-day extension, and some experts interpret the guidance as providing the longer benefit, retroactive to March 13, the date of the President’s COVID-19 disaster declaration.
  • As the letter notes, governmental restrictions and Stay at Home orders in place across the country, along with the fear of catching or spreading the life-threatening disease, threaten the ability of taxpayers to complete like-kind exchanges.
  • Identifying properties for trade purposes requires travel and a confidence in both the expected cash-flow stream and the value of potentially acquired property. Closing on an identified property requires these same conditions plus extensive due diligence by the buyer, lender and other third-party contractors, such as appraisers.  All of these necessary steps are thwarted by travel restrictions, the inability to access properties, and the closures of title/escrow companies and governmental recording offices.
  • The letter concludes, “This relief would give taxpayers who may have commenced, or who wish to commence an exchange, the necessary time to identify and / or close on a replacement property.  Taxpayers, many of whom are small to mid-sized businesses and middle class investors, should not have to be concerned about the possibility of having to pay significant capital gains taxes because like-kind exchange transactions cannot be completed due to the disruption caused by the coronavirus pandemic.”

Additional guidance from Treasury or the IRS on like-kind exchange transactions is expected in the coming days.

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IRS Grants Safe Harbors for Loan Modifications by Servicers of Mortgage-Backed Securities

Posted on by Trey Jackson

IRS Building

The IRS on April 13 issued rules that will help facilitate mortgage modifications and debt work-outs between borrowers and lenders when a loan is held in a mortgage-backed security.  The IRS guidance is consistent with the Roundtable’s request on March 20 that Treasury and the IRS take steps to protect private parties from the tax consequences of restructuring debt during the extraordinary and unanticipated COVID-19 pandemic.  

  • The new safe harbors extend to real estate mortgage investment conduits (REMICs) and investment trusts affected by loan forbearances and workouts due to the Covid-19 pandemic.  (IRS Rev Proc 2020-26)
  • REMICs are widely used vehicles for pooling mortgage loans and issuing residential and commercial mortgage-backed securities.  A REMIC is generally required to hold a substantially fixed pool of real estate mortgages and related assets and must not have the power to vary the composition of its mortgage assets. 
  • Even if an entity initially qualifies as a REMIC, one or more significant modifications of mortgages held by the entity may terminate its REMIC status.  Certain loan modifications are permitted if the change is “occasioned by default or a reasonably foreseeable default.”  A prohibited transaction by a REMIC, however, can result in a tax equal to 100 percent of the income from the transaction. 
  • The new IRS rules provide that REMICs and investment trusts can grant forbearance relief to COVID-19-affected borrowers – and REMICs can acquire mortgage loans for which such forbearance is already in place – without adverse tax consequences or threatening their tax status.  (Sidley Austin, April 15)
  • These safe harbors apply to mortgage loan forbearance that is provided voluntarily by the mortgage holder or servicer, forbearance that is State-mandated, and forbearance that is mandated in the Coronavirus Aid, Relief, and Economic Security (CARES) Act. 
  • The CARES Act generally provides temporary forbearance relief for borrowers with certain federally backed mortgage loans who are experiencing a financial hardship due directly or indirectly to the COVID-19 emergency. (JD Supra, April 16)

The rules extend to both residential and commercial mortgage loans, including federally backed mortgage, multifamily and any “non-federally backed mortgage loans,” with no explicit limits on the type of property financed. The specific safe harbors are profiled in Alston & Bird’s April 15 Advisory.

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IRS Guidance Ensures Real Estate Businesses Benefit from Phase Three Tax Relief

Posted on by Trey Jackson

IRS Building

This week, the IRS issued two revenue procedures that will help real estate businesses maximize the amount of tax relief they receive under the “Phase 3” CARES Act. The IRS actions are consistent with recent Real Estate Roundtable recommendations.

Partnership Amended Returns

  • The CARES Act included several provisions designed to generate deductions in prior years that can be “monetized” today, through the filing of amended tax returns, to help businesses stay afloat during the current economic turmoil.  As the Senate Finance Committee summary noted, “[t]hese changes will allow companies to utilize losses and amend prior year returns, which will provide critical cash flow and liquidity during the COVID-19 emergency.”  
  • In the understandable rush to enact the CARES Act, Congress did not have an opportunity to consider fully how provisions in the legislation would interact with various aspects of existing tax law and regulations.  In particular, under the partnership audit regime enacted in 2015, partnerships are no longer permitted to file amended tax returns.
  • In a letter on April 4, Roundtable President and CEO Jeffrey DeBoer urged the Treasury Department and IRS to use its regulatory authority to allow partnership to file superseding tax returns that could replace returns filed in 2018 and 2019. 
  • IRS Rev. Proc. 2020-23, released on Wednesday, allows partnerships to file amended returns for those years, effectively providing the relief The Roundtable requested.  

Business Interest Limitation

  • The Tax Cuts and Jobs Act created a new limitation on the deductibility of business interest, but allows real estate businesses to elect out, which most did in 2018.  The election is irrevocable, and the price of the election is longer cost recovery periods for real property and improvements.  The CARES Act liberalized the limitation on the deductibility of business interest for tax years 2019 and 2020.  However, the law did not allow real estate businesses to go back and change their election out of the regime.
  • In its April 4 letter, The Roundtable asked the IRS to allow real estate businesses to revoke elections made in 2018 and 2019.  This afternoon, the IRS issued the requested relief in Rev. Proc. 2020-22.

Like-Kind Exchanges

  • In addition to the actions related to the CARES Act, the IRS has provided relief to taxpayers having difficulty completing like-kind exchanges due to the COVID-19 pandemic.  In late March,  The Roundtable and 21 other national real estate organizations requested relief from the strict statutory deadlines that apply for identifying replacement property and closing on like-kind exchange transactions.  Under IRS Notice 2020-23, like-kind exchange deadlines that would otherwise fall between April 1 and July 14 are extended to July 15.

Opportunity Zones

  • Relief from the various deadlines and compliance testing dates for Opportunity Zones during the pandemic is a Roundtable priority.  IRS Notice 2020-23 provides that if a taxpayer’s 180-day period to invest gain in an opportunity fund would have expired between April 1 and July 14, 2020, the taxpayer now has until July 15, 2020 to make the investment.   

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