Category: Tax Policy

Tax Changes Affecting CRE in Senate “Phase 3” Coronavirus Package; Roundtable Submits Request for Administration to Waive COD Income

Posted on by Trey Jackson

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Senate Majority Leader Mitch McConnell (R-KY) unveiled a “Phase III” coronavirus economic stimulus proposal on March 19 that includes a number of tax provisions important to real estate – including a temporary reinstatement of the net operating loss carryback; relaxation of the current-law restrictions business interest deductions; and long-sought technical corrections to several provisions in the 2017 tax code overhaul (e.g. qualified improvement property). 

The Coronavirus Aid, Relief, and Economic Security (CARES) Act will be subject to change or additions as Democratic lawmakers and the White House with Republicans engage in urgent negotiations to produce a final bill by early next week. A number of tax provisions in the current package affecting real estate include: 

  • Temporarily increasing the threshold of deductible business interest under section 163(j) from 30% to 50% of EBITDA in 2019 and 2020.
  • Allowing a full 5-year carryback of net operating losses from 2018, 2019, and 2020 with no 80% income limitation.
  • A technical correction to the Tax Cuts and Jobs Act (TCJA) of 2017 cost recovery period for qualified improvement property.
  • A suspension of the new limitation on active losses of a pass-through business (section 461(l)) until 2021.
  • A technical correction to TCJA downward attribution of stock ownership rules.  

Other noteworthy tax provisions in the bill: 

  • Allows employers to defer payment of employer portion of Social Security tax (6.2%) in 2020, with the deferred amount payable in 2021 (50%) and 2022 (50%)
  • Provides recovery checks of up to $1,200 for individuals, $2,400 for married couples.  The rebates are increased by $500 for every child.  The rebates phase out for individuals with incomes above $75K and married couples above $150K.
  • Extends the filing date for income tax returns to July 15
  • Permits postponement of quarterly estimated tax payments due on April 15 and July 15 until October 15
  • Waives 10% early withdrawal penalty for retirement distributions up to $100K for coronavirus-related purposes. Provides favorable rules that spread out income recognition, allow for recontribution of withdrawals, and create additional flexibility for plan loans.
  • Allows non-itemizers to deduct up to $300 in charitable donations in 2020.
  • Suspends AGI limitation on charitable contributions by individuals and increases the AGI limitation on corporations to 25% in 2020.
  • Accelerates access to corporate AMT refundable credits.
  • Allows companies to recover overpayments of tax associated with TCJA one-time repatriation toll charge.

The full text of the CARES Act is available here and a lengthier summary is available here.  Additional Reference: Deloitte’s Tax News & Views March 20 summary.

Cancellation of Indebtedness (COD) Income 

The Real Estate Roundtable today asked Treasury Secretary Mnuchin and IRS Commissioner Charles Rettig to act quickly and use their broad authority to provide additional emergency tax relief that will help discourage permanent business closures, layoffs, and consumer bankruptcies.

Specifically, The Roundtable urges the Administration to waive cancellation of indebtedness (COD) income for all taxpayers for events generating COD income between March 1 and August 31, 2020.   (Roundtable COD letter, March 20)

  • Treasury has the authority to temporarily suspend COD income for one year under the statutory disaster relief tax provisions.  Waiving COD income will help facilitate private parties’ ability to engage in debt forgiveness, debt cancellation, and debt restructuring events that would not be necessary in ordinary times.
  • As the Roundtable letter explains, the action will free up much-needed financial resources that businesses can use to avoid force reductions and layoffs.  For families and individuals, waiving COD income will promote the mutual modification of obligations, including credit card debt, mortgages, student loans, and small business loans – helping them avoid bankruptcies and/or large, unwarranted tax bills.
  • The Roundtable also intends to work with Congress to ensure that it provides a permanent exemption of COD income that accrues during this extraordinary and unforeseeable public health and economic crisis.  
  • The Roundtable is also working with other real estate trade organizations to persuade Treasury to use its disaster relief authority to modify the deadlines applicable to like-kind exchange transactions.  The relief will avoid penalizing transactions delayed by the economic crisis.

As the repercussions of the corona pandemic continue to unfold, The Roundtable’s Tax Policy Advisory Committee (TPAC) continues to work on tax policies that benefit American workers, businesses and the overall economy. 

Treasury Secretary Mnuchin Addresses FIRPTA Reform at House Ways and Means Hearing

Posted on by Trey Jackson

 

Testifying before the House Ways and Means Committee on the President’s FY 2021 budget, Treasury Secretary Steven Mnuchin was questioned this week on the Foreign Investment in Real Property Tax Act (FIRPTA) and addressed potential steps he could take to encourage greater real estate investment from abroad.  (Watch 2:35 video of March 3 exchange with Mnuchin)

  • During the hearing’s Q&A with Secretary Mnuchin, committee member Kenny Marchant (R-TX) noted a recent letter that he and other GOP taxwriters sent to the Treasury Department urging a reevaluation of FIRPTA and related IRS guidance (Notice 2007-55).  
  • The congressional letter, led by Ways and Means Republican Devin Nunes (R-CA), encourages Treasury to withdraw section two of the IRS Notice, which effectively imposes U.S. capital gains tax on the liquidating distributions of domestically controlled real estate investment trusts (REITs).   Often, when a foreign investor is a minority partner in a U.S. real estate or infrastructure investment, the joint venture employs a domestically controlled REIT structure.
  • The 16 signatories of the February 20 letter wrote, “repealing the IRS Notice will restore the intent of Congress with respect to the tax law governing liquidations, provide parity to investors, and increase direct foreign investment in U.S. commercial real estate and infrastructure in every corner of the nation.”
  • During the hearing, Rep. Marchant called attention to the letter – and noted the IRS guidance applies FIRPTA to previously untaxed transactions involving domestically controlled REITs.  
  • Mnuchin responded that the Feb. 20 letter prompted a briefing at Treasury this week – and that he shares the concerns the letter  raises about FIRPTA.  “[I]t makes no sense that we discriminate against foreign investors,” Mnuchin said.  “But in my mind, anything we can do legally to encourage those investments we will do.  So thank you for the letter.  We are reviewing it.  It is at the top of my list,” he added. (Watch 2:35 video of Marchant and Mnuchin)
  • During another Ways and Means tax hearing last month, Rep. Marchant said, “FIRPTA is an outdated, discriminatory law.  It applies to no asset class other than real estate and infrastructure … Economic studies indicate repealing FIRPTA could drive $65 to $125 billion in new investment.”  (Watch video of Feb. 11 FIRPTA exchange).  Rep. Marchant is lead sponsor of the bipartisan Invest in America Act (H.R. 2210), a bill that would repeal the entire FIRPTA law. 
  • A similar letter was sent on December 18, 2019 to Secretary Mnuchin by a bipartisan group of 11 Senate Finance Committee Members led by Sen. Robert Menendez (D-NJ) – a longtime lead sponsor of FIRPTA repeal bills.  Another bipartisan letter to Secretary Mnuchin urging repeal of the IRS Notice was signed by 32 Representatives of the House Ways and Means shortly before introduction of the Tax Cuts and Jobs Act of 2017 (TCJA). (Roundtable Weekly, Dec. 20, 2019)

Members of the Roundtable’s Tax Policy Advisory Committee (TPAC) have met with Treasury officials on multiple occasions to discuss the harm caused by IRS Notice 2007-55.  Leading industry experts also convened on Oct. 30 at the National Press Club in Washington for an in-depth discussion the economic damage incurred by the IRS Notice.  An industry coalition is scheduled to meet with officials in Treasury’s Office of Tax Policy next week to discuss the issue.

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House Ways & Means Republicans Ask Treasury Secretary Mnuchin to Boost Investment, Create Jobs by Easing FIRPTA Tax Burden

Posted on by Trey Jackson

Treasury Department

Over three-quarters of the Republican Members of the House Ways and Means Committee on Feb. 20 urged Treasury Secretary Steven Mnuchin to remove tax barriers to foreign investment in U.S. real estate and infrastructure.  

  • The congressional letter, led by Representative Devin Nunes (R-CA), encourages Treasury to withdraw section two of IRS Notice 2007-55.  The Notice, which relates to the Foreign Investment in Real Property Tax Act (FIRPTA), effectively imposes U.S. capital gains tax on the liquidating distributions of a domestically controlled REIT. 
  • Domestically controlled REITs commonly are employed in joint ventures where a foreign investor is a minority partner in a U.S. real estate or infrastructure investment.  Prior to the Notice, a liquidating distribution from a domestically controlled REIT was treated as nontaxable sale of stock for tax purposes. 
  • The 16 signatories of the February 20 letter wrote that “repealing the IRS Notice will restore the intent of Congress with respect to the tax law governing liquidations, provide parity to investors, and increase direct foreign investment in U.S. commercial real estate and infrastructure in every corner of the nation.”
  • The Ways and Means Republican letter comes on the heels of a high-profile exchange on the broader economic harm caused by FIRPTA at a recent Ways and Means tax hearing.  At the hearing, Rep. Kenny Marchant (R-TX), said that “FIRPTA is an outdated, discriminatory law.  It applies to no asset class other than real estate and infrastructure . . . Economic studies indicate repealing FIRPTA could drive $65 to $125 billion in new investment.” Rep. Marchant is lead sponsor of the bipartisan Invest in America Act (H.R. 2210), a bill to repeal FIRPTA altogether.  (Watch video of Feb. 11 FIRPTA exchange)
  • In conjunction with The Roundtable’s Tax Policy Advisory Committee (TPAC) meeting on January 29, Darin Mellott, Director of Americas Research at CBRE shared updated data indicating that foreign capital represented only 10 percent of total transaction volume between 2007 and 2019 – further evidence that FIRPTA weighs heavily on potential inbound investment.  In other asset classes, such as manufacturing, foreign capital represents a much larger share of overall investment. 
  • A letter similar to the House Republican letter was sent by a bipartisan group of 11 Senate Finance Committee Members to Secretary Mnuchin on December 18, 2019.  The December letter was led by Sen. Robert Menendez (D-NJ), a longtime lead sponsor of bills to roll back FIRPTA, and Sen. Johnny Isakson (R-GA).  A bipartisan House Ways and Means Committee letter urging repeal of the Notice and signed by 32 Representatives was sent to Secretary Mnuchin shortly before introduction of the Tax Cuts and Jobs Act of 2017 (TCJA). ( Roundtable Weekly , Dec. 20, 2019)

Members of the Roundtable’s Tax Policy Advisory Committee have met with Treasury officials on multiple occasions to discuss the harm caused by IRS Notice 2007-55.  Since 2017, Treasury’s regulatory agenda has focused on implementing the TCJA.  With TCJA implementation nearly complete, The Roundtable is now urging Treasury officials to give the Notice the attention it merits.

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White House Releases FY 2021 Budget; Congressional Hearings Focus on Administration Policy Priorities, Including FIRPTA Repeal

Posted on by Trey Jackson

FY2021 Budget Cover x475

The Trump Administration on Monday released a $4.8 trillion budget for FY 2021 signaling policy priorities for a potential second term, followed by Senate and House committee hearings this week that focused on the proposal and tax-related issues – including FIRPTA repeal; correcting a drafting error affecting qualified improvement property (QIP); and expansion of the low-income housing tax credit.  (Administration’s 2021 budget proposal and supporting budget materials)

  • Initial budget proposals from the White House are useful only as a starting point for funding negotiations with Congress, which can produce a significantly different budget reflecting vastly different policy positions. 
  • The Administration’s FY 2021 budget proposal would also reverse a two-year deal negotiated with Congress last summer.  While the August deal raised spending limits for both defense and domestic programs, this week’s proposed budget would cut domestic spending by six percent. (The Hill, Feb. 9)
  • The proposed budget also includes the elimination of several energy tax incentives of importance to real estate, including:

* Repeal credit for residential energy efficient property placed in service after December 31, 2020.

* Repeal accelerated depreciation for renewable energy property —including solar energy, wind energy, biomass, geothermal, combined heat and power, and geothermal heat pump property; fuel cells; and micro-turbines—would range from five to 20 years. Qualifying properties would still be eligible for the bonus depreciation allowance included in the 2017 tax overhaul.

* Repeal energy investment credit for property where construction begins after December 31, 2020.

  • The White House budget, which would also devote billions to construct a border wall with Mexico and lead to a $966 billion deficit, was immediately rejected by House Speaker Nancy Pelosi (D-CA) and criticized by House Budget Committee Chairman John Yarmuth (D-KY). (Associated Press, Feb. 9)

  • Republican Senate Budget Chairman Mike Enzi (WY) also weighed in with a Feb. 10 statement.  “Presidents’ budgets are a reflection of Administration priorities, but in the end, they are just a list of suggestions, as the power of the purse rests with Congress. Bipartisan consensus will be necessary to bring our debt and deficits under control. I hope to work with my colleagues on both sides of the aisle to put our country on a more sustainable fiscal course.”

Congressional Hearings

Administration officials appeared before congressional committees this week to testify about the budget proposal and face Q&A on other policy issues.

  • Secretary of the Treasury Steven Mnuchin testified on Feb. 12 before the Senate Finance Committee, urging Congress to make the temporary provisions of the 2017 tax law permanent.

  • During Q&A, Mnuchin also expressed interest in working with Sen. Maria Cantwell (D-WA) and Senate Banking, Housing and Urban Affairs Ranking Member Sherrod Brown (D-OH) on expanding the Low Income Housing Tax Credit (LIHTC).
  • The Treasury Secretary reiterated his support for Sen. Pat Toomey’s (R-PA) bill to correct a drafting error in the 2017 tax law that unintentionally requires retailers to depreciate certain property improvements over 39 years – rather than the intended option of immediate expensing.  Correcting this qualified improvement provision (QIP) is, Mnuchin testified, “our number one request to get a congressional fix for.”  (Senate Finance Committee hearings, with video)
  • In the House, the Ways and Means Committee on Feb. 11 held a hearing on “The Disappearing Corporate Income Tax, which was preceeded by a Joint Committee on Taxation report on corporate income tax policy.
  • During Q&A, Committeee Member Kenny Marchant (R-TX), sponsor of the Invest in America Act (H.R. 2210, engaged witnesses on the importance of repealing the Foreign Investment in Real Property Tax Act of 1980 (FIRPTA).
  • Jason Furman – an economics professor at the Harvard Kennedy School of Government and former chair of the White House Council of Economic Advisers – responded to Rep. Marchant, “I think it is certainly worth taking a serious look at repealing it … In the Obama Administration we did take a look at this and it did seem like there was some infrastructure investment that wasn’t coming in to the country as a result of it.”
  • Douglas Holtz-Eakin – a former director of the Congressional Budget Office and the sole Republican witness – told the committee, “This is a law whose time has passed.  It should be repealed.”  ( Watch video of Rep. Marchant’s FIRPTA exchange)

More congressional hearings on the budget and appropriations are scheduled after lawmakers return from next week’s congressional recess.

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House Ways and Means Committee Signals Green Energy Tax Bill; Trump Administration Developing “Tax 2.0” Proposal

Posted on by Trey Jackson

House Ways and Means Committee Chairman Richard Neal (D-MA) recently confirmed plans to advance legislation in 2020 that would expand and create new renewable energy and energy-efficiency tax incentives.  “We talked about (the markup) this morning,” Neal told reporters on Jan. 14. He added, “We are scheduling events.” (BGov, Jan. 15 and Jan. 24) 

  • The starting point for green energy tax legislation in the Ways and Means Committee is likely a draft bill unveiled last November by Rep. Mike Thompson (D-CA), who chairs the Subcommittee on Select Revenue Measures. 
  • Rep. Thompson’s discussion draft of the Growing Renewable Energy and Efficiency Now (GREEN) Act would modify the enhanced deduction for energy-efficient commercial building property (section 179D);create an expanded tax credit for the developers of new, energy-efficient home (section 45L); and modify the tax credit for energy-efficient improvements to existing homes (section 25C).  (Roundtable Weekly, Nov. 22) (Rep. Thompson news release with link to the GREEN tax draft legislation, Nov. 19) 
  • The Real Estate Roundtable and other real estate and environmental organizations are encouraging Members of Congress to consider an additional proposal that would incentivize existing buildings to purchase and install energy-efficient upgrades that reduce greenhouse emissions, generate taxpayer savings, and spur innovation and investment.    
  • Specifically, draft legislation under review would create a new category of energy-efficient qualified improvement property (E-QUIP) that is subject to an accelerated 10-year depreciation period.  The E-QUIP benefit would apply to purchases of modern and energy-efficient HVAC, lighting, and building envelope improvements, such as energy-saving roofs and windows. (Roundtable Weekly, May 10)

Separately, President Trump on Jan. 22 said a substantial middle-class tax cut – referred to as “Tax Cut 2.0” – will be released within 90 days, during an interview with Fox Business’ Maria Bartiromo at the World Economic Forum in Davis, Switzerland.  (Reuters, Jan. 22)

  • Treasury Secretary Steven Mnuchin told CNBC at the same conference, “The president has asked us to start working on what we call ‘tax 2.0,’ and that will be additional tax cuts. They’ll be tax cuts for the middle class, and we’ll also be looking at other incentives to stimulate economic growth.”  (CNBC, Jan. 23)
  • Larry Kudlow, director of the White House National Economic Council, told FOX Business’ Liz Claman on Jan. 17 that “The president directed me to produce what we’re calling ‘tax cuts 2.0.’  It will be published sometime during the campaign, has a message for future Trump economic growth policies, particular emphasis on the middle class in his second term.”
  • A legislative path toward passage of individual tax bills in an election year is very narrow, but separate tax proposals by Congress and the White House could culminate in an end-of year compromise package. 

Tax issues for 2020 will be a focus at next week’s Roundtable State of the Industry Meeting in Washington – both during the Jan. 28 business meeting and the Jan. 29 Tax Policy Advisory Committee (TPAC) meeting.  

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Year-End Tax Package Uncertain; House Ways & Means Votes to Suspend Cap on State and Local Tax Deduction

Posted on by Trey Jackson

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[Above: Members of the House Ways and Means Committee, including Chairman Richie Neal (D-MA), top center, and Ranking Member Kevin Brady (R-TX), top right.]

Prospects for a year-end tax bill are uncertain as congressional leadership and the Trump Administration expect to reveal details of a nearly $1.4 trillion FY2020 spending deal next week.  Meanwhile, the House Ways and Means Committee on Dec. 11 approved a temporary suspension of the $10,000 deduction cap on state and local taxes (SALT) enacted in the 2017 tax reform bill.

  • The Restoring Fairness for States and Localities Act (H.R. 5377) passed Ways and Means on a mostly party line vote of 24-17. The bill would raise the SALT deduction cap from $10,000 to $20,000 for married couples in 2019 and repeal the limit entirely for 2020 and 2021.
  • The measure’s costs would be offset by an increase in the top individual tax rate from 37 percent to its pre-2017 tax law level of 39.6 percent through 2025, when tax provisions in the 2017 tax overhaul are set to expire.  (The Hill, Dec. 11)
  • A description of the proposed changes to the SALT cap and top rate bracket are available from the Joint Committee on Taxation.
  • H.R. 5377 is expected to pass the House if it gets a vote next week on the House floor. The House Rules Committee has announced a hearing on the bill for December 16. However, the GOP-led Senate is unlikely to consider the legislation.  (BGov, Dec. 11)
  • If any tax measures are to be enacted this year, they would likely have to ride on an “omnibus” spending bill, which may be broken into two packages for votes next week before Congress is scheduled to recess on Dec. 20.
  • Disagreements between House Democratic and Senate Republican tax-writers over what measures should have priority, combined with the large number of tax items competing for consideration, are complicating prospects for agreement. 
  • Senate Majority Whip and Finance Committee member John Thune (R-SD) on Dec. 12 said, “At the moment, nothing’s happening.”  (Deloitte Tax News & Views, Dec. 13)
  • Senate Finance Committee member Sherrod Brown, (D-OH) commented to reporters Dec.12 about what tax measures are under negotiation.  “It’s still all over the place,” Brown said.  Committee member Sen. Rob Portman (R-OH) stated, “I’m frustrated because I don’t think we have an agreement yet on anything.”  (Tax Notes, Dec. 13)

A summary of the expired and expiring tax deductions, credits, and incentives that would be renewed through 2020 under the Taxpayer Certainty and Disaster Relief Act (H.R. 3301), which the House Ways and Means Committee approved on June 20, is available from Deloitte Tax LLP.

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Treasury Issues Final Regulations Modifying Rules for Allocating Real Estate Debt Among Partners

Posted on by Trey Jackson

Final regulations released by the Treasury Department last Friday and effective October 9 provide new tax guidance on the allocation of liabilities between partners in a real estate partnership.  The new rules bring to a conclusion a regulatory project that started over six years ago.

  • How real estate debt and other liabilities are allocated among partners when property is contributed to a partnership carry important tax consequences.  Allocation rules can determine whether built-in gain is recognized or deferred at the time of the contribution.  The rules also affect whether a partner obtains sufficient tax basis to deduct future losses.  Generally, a partner receives full basis for partnership debt if the debt is recourse and the partner is obligated to pay off the loan in the event the partnership defaults.
  • The new regulations will likely complicate taxpayers’ ability to achieve a preferred allocation of real estate liabilities (and deductions) through the use of liability guarantees such as “bottom guarantees,” capital account deficit restoration obligations, and other payment or reimbursement arrangements. 
  • A bottom guarantee is a guarantee of the last dollars of a liability.  The lender may pursue the guarantor only if the lender is unable to collect at least the guaranteed amount of the loan from the borrower.  The final rules will largely restrict the use of bottom guarantees.  Treasury expressed concerns that bottom guarantees lack a non-tax commercial purpose, are “structured to insulate the obligor from having to pay,” and do not represent a real economic risk of loss.
  • On four separate occasions, The Roundtable submitted comments on the partnership liability regulatory project, which began in 2013. Additionally, a working group from The Roundtable’s Tax Policy Advisory Committee (TPAC) previously met with Treasury and IRS officials.  The Roundtable had concerns that changes would disrupt longstanding partnership tax rules and increase the tax liability of previously untaxed real estate reorganization transactions.  [Roundtable Comment Letters: March 13, 2013 and April 7, 2017  and August 7, 2017 ] 
  • Input from The Roundtable, TPAC members and other stakeholders contributed to several revisions to the proposed rules over the last five years.  The rules published in the Federal Register on October 9 finalize temporary regulations under section 752 that were released in 2016 and scheduled to expire this month.  Those 2016 regulations were revised versions of the rules initially proposed in 2014.  The October 9 rules also finalize proposed regulations issued in June 2018 that walked back 2016 proposed regulations with respect to the allocation of debt in “disguised sales” transactions under section 707. 
  • The preamble to the final rules notes that Treasury continues to consider the appropriate treatment of “exculpatory liabilities” that are recourse to an entity under state law, but where no partner bears the economic risk of loss.

The final regulations provide critical transition relief.  The rules generally apply to liabilities incurred or assumed by a partnership, and to payment obligations imposed or undertaken with respect to a partnership liability, on or after October 9, 2019.  The new restrictions do not apply if the liability was incurred or assumed by a partnership, or the payment obligation was imposed or undertaken, pursuant to a written binding contract in effect prior to October 9.

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Top Senate Democratic Tax-Writer Proposes New Capital Gains Regime, Ending Preferred Rate

Posted on by Trey Jackson

Sen. Ron Wyden (D-OR)

On Thursday, Senate Finance Committee Ranking Member Ron Wyden (D-OR) presented and released a detailed white paper outlining his plan to reform the taxation of capital gains.  (News Conference Video, Center for American Progress Action Fund, Sept. 12)   

  • Entitled “Treat Wealth Like Wages,” the proposal is billed by the top Democratic tax-writer in the Senate as “a plan to fix our broken tax code, ensure the wealthy pay their fair share, and protect Social Security.”  Sen. Wyden’s proposal would end the preferred tax rate for capital gains and impose annual mark-to-market taxation of capital assets for taxpayers above certain income thresholds.
  • Both proposals represent dramatic departures from existing tax law.  They are direct challenges to two fundamental principles that support capital formation, entrepreneurship, and long-term investment: (1) tax on capital gain should be deferred until it is realized, and (2) capital gain should be subject to a reduced tax rate.
  • The mark-to-market rules, which Sen. Wyden refers to as “anti-deferral accounting rules, would apply to taxpayers averaging $1 million in income or $10 million in assets over the last 3 years.  “Tradable” assets such as stocks and bonds would be subject to annual taxation of unrealized gains. Taxpayers could take a deduction for unrealized losses.
  • While “non-tradable” assets like real estate would not be subject to mark-to-market on an annual basis, they would be subject to an additional layer of tax – a “look-back charge” – for the theoretical benefit of the tax deferral when the asset is sold, or certain other revaluation events occur.  This look-back charge would be in addition to the capital gains tax, which would be set at the top ordinary income tax rate. 
  • The structure of the look-back charge is undefined.  Sen. Wyden’s paper describes a few options:  (1) an interest charge on deferred tax; (2) a yield-based tax designed to eliminate the benefits of deferral; or (3) a surtax based on an asset’s holding period.  The look-back charge would also be imposed at death, even if the asset is not sold (the basis of the asset would step up at death).
  • Special rules would apply for pass-through entities.  For example, the Wyden proposal would require a partnership to calculate the lookback charge when real estate is contributed to or distributed from the partnership – and report each partner’s share.
  • Built-in gain on existing assets would be subject to the tax, paid over an unspecified transition period.  The estimated $1.5 – $2 trillion of revenue raised from the proposal would be dedicated towards shoring up the long-term solvency of Social Security.  (CNBC, Sept. 12)

  • “Congress should strengthen tax rules that promote capital formation, not weaken them, which is what Sen. Wyden’s proposal would do,” said Real Estate Roundtable President and CEO Jeffrey DeBoer.  He added, “Rewarding risk-taking, long-term investment, and entrepreneurship is at the heart of the American economic model. By eliminating any tax incentive to pursue projects that have a pay-off that is far in the future, the proposal would discourage businesses and individuals from undertaking the long-term, capital-intensive investments that drive productivity and economic growth by deepening and enriching our Nation’s capital stock, including its commercial real estate.”   

    Sen. Wyden invited comments about the proposal on a wide variety of issues, such as how to calculate the look-back charge and whether debt should reduce the value of property when measuring a taxpayer’s aggregate assets.   The Roundtable’s Tax Policy Advisory Committee (TPAC) plans to review the proposal in detail and submit comments.  

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Senate Finance Committee Task Force Proposes Making Tax Deduction for Energy Efficient Buildings (sec. 179D) Permanent

Posted on by Trey Jackson

A bipartisan group of Senate Finance Committee policymakers this week recommended the tax deduction for energy efficient commercial buildings (section 179D) should become a permanent provision in the federal tax code.  Section 179D expired at the end of 2017.  ( BloombergTax , Aug. 13) 

Senate Finance Chairman Chuck Grassley (R-IA), right, and Ranking Member Ron Wyden (D-OR), left, set up five bipartisan task forces in May to consider long-term solutions for more than 40 temporary provisions in the federal tax code that repeatedly expire and come up for renewal.
  • Senate Finance Chairman Chuck Grassley (R-IA) and Ranking Member Ron Wyden (D-OR) set up five bipartisan task forces in May to consider long-term solutions for more than 40 temporary provisions in the federal tax code that repeatedly expire and come up for renewal.   
  • Three of the task forces released reports on Wednesday, addressing the areas of cost recovery (e.g., sec. 179D) and energy (e.g., sec. 45L credit for energy-efficient new homes).   In addition to recommending permanency for section 179D, the Cost Recovery Temporary Tax Policy Task Force led by Senators Mike Crapo (R-ID) and Ben Cardin (D-MD) noted that further improvements to the provision would accelerate its positive impact.
  • The reports refer to extensive comments from stakeholders, including The Real Estate Roundtable and industry coalitions.  The committee also posted further information about the temporary tax policies that the task forces examined.  
  • The task forces’ “thorough and bipartisan approach will form the foundation of the committee’s work to provide more certainty to temporary tax policy,” Grassley said. “The next step will be to put together a legislative package based on the proposals that the taskforces received, the areas of consensus among the taskforce members and continued bipartisan discussions.” (SFC news release, Aug. 13) 
  • In the House, the Ways and Means Committee on June 20 passed legislation to extend a host of expired and expiring tax credits through 2020, including section 179D.  (Markup of House Tax Legislation and Roundtable Weekly, June 21)  The Taxpayer Certainty and Disaster Tax Relief Act of 2019 (H.R. 3301) includes other provisions affecting real estate:  

    •  Credit for construction of new energy efficient homes (sec. 45L)

    •  Credit for energy efficient improvements to existing homes (sec. 25C)

    •  Exclusion of mortgage debt forgiveness (sec. 108(a)(1)(E))

    •  Deductibility of mortgage insurance premiums (sec. 163(h)(3)(E))

    •  New markets tax credit (sec. 45D)  

    •  Empowerment zone tax incentives (sec. 1391-97)

      Building Owners and Managers Association (BOMA) International President and Chief Operating Officer, Henry Chamberlain, testified before Ways and Means last year to support Section 179D’s permanence.  ( BOMA testimony -March 14, 2018)
    • Building Owners and Managers Association (BOMA) International President and Chief Operating Officer, Henry Chamberlain, testified before Ways and Means last year to support Section 179D’s permanence.  (BOMA testimony, March 14, 2018) 
    • On a separate track from extenders and 179D is an energy efficiency tax proposal urged by The Roundtable and a broad coalition of real estate and environmental organizations.  The groups urge House and Senate tax writers to establish an accelerated depreciation schedule for a new category of Energy Efficient Qualified Improvement Property installed in buildings – or “E-QUIP” – with a 10-year cost recovery period (Coalition E-QUIP Letter, May 8) 
    • Roundtable President and CEO Jeffrey DeBoer stated, “The purpose of establishing a new E-QUIP category in the tax code is to stimulate productive, capital investment on a national level that modernizes our nation’s building infrastructure while helping to lower greenhouse gas emissions.”  (Roundtable Weekly, May 10) 

    When Congress returns on September 9 from summer recess, additional changes to the Ways and Means extenders bill may be made as it moves to the House floor, and then to the Senate.  However, passage of spending bills to fund the government beyond September 30 are considered must-pass legislation.  Whether an extenders bill can be attached to an FY’20 appropriations bill is uncertain at this time.    

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    Republican Senators Urge Treasury to Index Capital Gains to Inflation

    Posted on by Trey Jackson

    Twenty-one Senate Republicans led by Ted Cruz  (R-TX) this week urged Treasury Secretary Steven Mnuchin to use his regulatory authority to eliminate inflationary gains from the calculation of capital gains tax liability.  (Letter to Secretary Mnuchin , July 29)

    The Treasury Department may have the legal authority to adopt inflation indexing through regulatory guidance.  The term “cost” in the tax code’s capital gains provisions arguably is ambiguous and not plainly limited to historical cost,   i.e ., the price originally paid for a capital asset.  
    • Capital gains tax is generally based on the difference between the sale price of a capital asset and its original cost, adjusted for certain factors such as depreciation.  Capital gain liability includes an amount that reflects general price inflation, in addition to the true economic gain.  Especially for long-held assets such as real estate, capital gain thus overstates a taxpayer’s economic income.  
    • The Republican Senators’ letter suggests that indexing capital gains for inflation “would unlock capital for investment, increase wages, create new jobs, and grow the economy.”  
    • The Treasury Department may have the legal authority to adopt inflation indexing through regulatory guidance.  The term “cost” in the tax code’s capital gains provisions arguably is ambiguous and not plainly limited to historical cost, i.e., the price originally paid for a capital asset.  
    • Supporters of the proposed plan include President Trump’s National Economic Council Director Larry Kudlow, who is leading a White House task force examining the proposal. (Wall Street Journal, March 20, 2018) 
    • Stephen Moore, former advisor to President Trump’s 2016 campaign, also recently wrote that President Trump wants to move forward with capital gains indexing.  (Washington Times, July 14, 2019) 
    • However, a 1992 memorandum written by President George H.W. Bush’s administration determined that Treasury did not have the power to index capital gains by regulation. (Justice Dept. Opinion – Sept. 1, 1992).  In contrast, more recent legal analysis has found support in subsequent case law. (Harv. J. Law & Pub. Policy, 2012).  
    • Conservatives such as Americans for Tax Reform President Grover Norquist cite a 2002 Supreme Court decision in a case between Verizon Communications and the Federal Communications Commission to show Treasury can act unilaterally on the issue.  (Americans for Tax Reform – June 26, 2019) 
    • Congressional Democrats have come out strongly against the proposal.  A recent letter to Secretary Mnuchin from 15 Democratic Senators stated, “We urge you to reject reported plans to use questionable authority to – yet again – lavish tax cuts upon our country’s wealthiest, while middle class families and working people continue to see costs rise and wages stagnate.”  (Senate Democratic letter, July 12).  House Ways and Means Committee Chairman Richard Neal (D-MA) on Wednesday stated, “If the Trump Administration unilaterally changes the capital gains tax structure, it wouldn’t just be bad policy, it would be executive overreach.”  (Ways and Means news release, July 31)   

    Senate Finance Committee Ranking Member Ron Wyden (D-OR) this week also responded to the proposal, stating, “The Office of Legal Counsel has plainly stated that the Treasury secretary does not have the authority to index capital gains tax rates.”  (Senate Finance news release, July 30).  Wyden added such an action would “absolutely” end up in court.  “We will oppose this strongly, because this is another backdoor effort to flout responsible tax policy,” he told reporters. (TaxNotes, July 31 and New York Times, July 30)