Category: Tax Policy

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) 

    Real Estate Provisions Included in Tax Extenders Legislation Approved by House Ways and Means Committee

    Posted on by Trey Jackson

    The House Ways and Means Committee yesterday passed legislation to extend a host of expired and expiring tax credits through 2020 by a vote of 25-17.  Among the bills advanced to the House floor for consideration is the Taxpayer Certainty and Disaster Tax Relief Act of 2019 (H.R. 3301), which includes a deduction for energy efficient commercial buildings (Section 179D).  (House Ways and Means, Markup of Tax Legislation).

      The House Ways and Means Committee yesterday passed legislation to extend a host of expired and expiring tax credits through 2020, including several afecting real estate.
    • Committee Chairman Richard Neal (D-MA) said in his opening statement that extenders would provide “needed certainty for businesses making use of tax provisions that expired in 2017 and 2018, as well as some set to expire this year.”  
    • In addition to the Section 179D tax deduction, H.R. 3301 and its Amendment in the Nature of a Substitute contain other provisions affecting real estate:   

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

      • Credit for energy efficient improvements to principal residences (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 )

    In conjunction with the markup, the Joint Committee on Taxation (JCT) issued a report on the estimated revenue effects of H.R. 3301, concluding the extenders bill portion would cost $42.5 billion, which includes $9.3 billion in tax relief for disaster areas. (JCT technical description)  

    Ways and Means Chairman Neal indicated he plans to hold a Committee vote on a technical corrections bill later in the year.  
    • The Democrats’ bill would accelerate expiration of the increase in the estate tax exemption that was included in the Tax Cuts and Jobs Act (TCJA).  TCJA doubled the estate tax exemption from $5.7 million to $11.4 million (indexed for inflation).  Under current law, the temporary increase expires at the end of 2025.  In order to pay for the tax extender legislation, the bill accelerates expiration of the estate tax exemption increase to the end of 2022. 
    • Several Republicans expressed concerns over continuing to pass tax “extenders” legislation without looking for long-term solutions to reform, make permanent, or repeal the various provisions.  Chairman Richard Neal (D-MA) said he is willing to consider any suggested reforms at a later stage. (BGov, June 20)
    • In response to an unsuccessful Republican amendment that would have made a number of technical corrections to TCJA, including a much-needed reduction in the cost recovery period for qualified improvement property, Chairman Neal indicated he plans to hold a Committee vote on a technical corrections bill later in the year. 

    The Democratic extender bill is widely viewed as an initial negotiating position for talks with Senate Republicans.  Additional changes may be made as the bill goes to the House floor.  In the Senate, Finance Committee Chairman Chuck Grassley (R-IA) and Ranking Member Ron Wyden (D-OR) in May announced the formation of several bipartisan taskforces to examine and help permanently resolve the fate of more than 30 expired and expiring tax provisions. (Senate Finance Committee   Announcement , May 16 and Roundtable Weekly , May 17) 

    New York Overhauls Rent Regulations as Affordable Housing Shortage Attracts National Attention

    Posted on by Trey Jackson

    Major changes to New York City’s rent regulations passed in Albany last week have drawn attention to a nationwide resurgence of rent control laws considered by cities and states across the nation.  ( Wall Street Journal , June 14).

    By keeping more New York City apartments permanently in the regulated system, the new law will diminish the number of available market-rate units, drive-up market-rate rents, and perpetuate an imbalance in affordable housing supply and demand.  
    • The law signed by Governor Andrew Cuomo on June 14 directly impacts about 40 percent of New York City’s apartment stock and expands rent stabilization to counties across the state.  The law generally freezes “stabilized” NYC apartments from ever moving to market rental rates.  (New York Times ,June 12 and June 17).  
    • By keeping more apartments permanently in the regulated system, the new law will diminish the number of available market-rate units, drive-up market-rate rents, and perpetuate an imbalance in affordable housing supply and demand.  Affluent Manhattan residents in stabilized apartments who enjoy a rental windfall will stay in place, while lower-income residents in outer boroughs will likely bear higher rent burdens.  (Wall Street Journal, June 12) 
    • The New York law also dis-incentivizes owners from modernizing aging housing with new roofs, boilers, security systems, and other improvements.  By capping annual rent increases that an owner can charge for major building-wide capital investments, one critic has warned that the law could lead to a “shabbification of rental housing.”  (Citylab, June 13). 
    • Real Estate Board of New York (REBNY) President John Banks stated, “The harmful impact of this legislation will be profound for New York City’s economic future … This legislation will keep rent lower for some, but also significantly diminish housing quality and lead to less tax revenue to pay for vital government services.”  (REBNY statement, June 18) 

    Affordable Housing: A National Issue

    New York’s action is part of a growing trend of jurisdictions purporting to address skyrocketing housing costs though rent regulations.  Meanwhile, candidates on the 2020 campaign trail are offering plans to address the nation’s “affordable housing crisis.”  ( NPR,  June 18)  

      An  interactive national map provided by the National Multifamily Housing Council (NMHC) details the movement of state capitals eying rent control measures.   
      • An interactive national map provided by the National Multifamily Housing Council (NMHC) details the movement of state capitals eying rent control measures.  
      • A real estate industry coalition recently opposed a rent control measure under consideration in California.  In a letter to Sacramento lawmakers, the coalition explained that increasing housing supplies with new construction built by public-private partnerships will “help bring the price point down,” and that it is “more effective to tie assistance to a renter rather than a rental unit.” (NMHC, June 17) 
      • Proposals in Congress that aim to expand and incentivize the construction of affordable housing would be more effective in addressing the nation’s housing challenges (compared to government-mandated rental price-fixing).  Recently proposed measures would expand the low-income housing tax credit program (e.g., S. 1703,  H.R. 3077), and create a similar tax credit geared to moderate-income, workforce housing (S. 3365, 115th Cong.). 
      • Housing and Urban Development Secretary Ben Carson has offered a strategy to boost affordable housing by encouraging localities to ease their own building restrictions. Carson’s proposal has gained support of House Financial Services Committee Chair Maxine Waters (D-CA).  It would provide federal monetary incentives for local governments to ease land-use and zoning regulatory barriers that can feed into “NIMBY-opposition” against affordable housing and drive-up development and construction costs. (Politico, June 14) 

      “Although they are well-intended, we know from decades of experience that rent control regulations distort markets, create shortages, and depress business investments.  They often harm the communities they seek to help,” said Jeffrey D. DeBoer, President and CEO of The Real Estate Roundtable. “Policy makers should avoid rent control measures and rather seek solutions that grow America’s residential stock, to enable our communities to provide safe and decent housing for low-income families and the teachers and first-responders in our workforce.”

      House Tax Writers Air Priorities, Address Technical Correction for Qualified Improvement Property Provision

      Posted on by Trey Jackson

      The House Ways and Means Committee on June 4 held a Members’ Day Hearing to address tax legislative priorities for the remainder of the year – including technical corrections to the Tax Cuts and Jobs Act (TCJA) that would correct a drafting error affecting qualified improvement property (QIP).  Numerous other tax priorities are also expected to crowd the congressional agenda, including expired or expiring tax provisions; repeal of the state and local tax deduction cap; the national debt limit; and budget spending caps.

      The House Ways and Means Committee held a Members’ Day Hearing to address tax legislative priorities for the remainder of the year – including technical corrections to theTax Cuts and Jobs Act(TCJA) that would correct a drafting error affecting qualified improvement property (QIP).

      • A coalition of businesses and trade groups, including The Real Estate Roundtable, urged all members of Congress in April to cosponsor the Restoring Investment in Improvements Act (H.R. 1869 /  S. 803) – a bill that would correct the QIP drafting error.  The legislation would give qualified improvement property a 15-year depreciation period and restore its eligibility for accelerated bonus depreciation. (QIP Policy Comment Letter and Roundtable Weekly, April 26)
      • The QIP error has resulted in a significantly longer 39- or 40-year cost recovery period for interior improvements to nonresidential property, such as tenant build-outs.  The intent of Congress was to allow the immediate expensing of QIP – or provide a 20-year recovery period in the case of taxpayers electing out of new limitations on the deductibility of business interest.
      • During the hearing, Rep. Adrian Smith (R-NE) said that QIP should be addressed as soon as possible and technical corrections should reflect the intent of lawmakers.  Rep. Roger Marshall (R-KS) discussed how QIP’s 39 depreciation adversely impacts small businesses, suggesting it should be dropped to 15 years.  And Rep. Jackie Walorski (R-IN) emphasized the need for a QIP fix, advocating for H.R. 1869. 
      • Reps. Walorski and Jimmy Panetta (D-CA) introduced the Restoring Investment in Improvements Act on March 26. The Senate companion bill (S. 803) was introduced earlier that month by Sens. Pat Toomey (R-PA) and Doug Jones (D-AL).  (Roundtable Weekly, March 15) 

        Ways and Means Chairman Richard Neal (D-MA) will discuss tax policy with Roundtable members on June 11 during the organization’s Annual Meeting in Washington, DC.

      • Beth Bell, Democratic tax counsel for Ways and Means, acknowledged many committee members are interested in TCJA technical fixes, including QIP.  Yet she emphasized during a May 30 Federal Bar Association meeting, “I think we need to get through processing or considering what to do with an extenders package before we get to a technical corrections package.” (BGov, May 30)
      • In the Senate, Finance Committee Chairman Chuck Grassley (R-IA) and Ranking Member Ron Wyden (D-OR) last month announced the formation of several bipartisan taskforces to examine and help permanently resolve the fate of 42 expired and expiring tax provisions.  (Senate Finance Committee Announcement, May 16 and Roundtable Weekly, May 17)
      • A preliminary draft of House legislation obtained by Bloomberg Tax last week would pay for the extension of temporary tax provisions through 2019 by changing the expiration date of estate tax relief included in TCJA. 

      House Ways and Means Chairman Richard Neal (D-MA) will discuss tax policy with Roundtable members on June 11 during the organization’s Annual Meeting in Washington, DC.  QIP and tax extenders will be among several tax policy issues discussed in detail during The Roundtable’s Tax Policy Advisory Committee (TPAC) meeting on June 12.

      Treasury Releases Proposed Regulations on FIRPTA Foreign Pension Fund Exemption

      Posted on by Trey Jackson

      The Treasury Department yesterday issued proposed tax regulations clarifying the scope and operation of the foreign pension fund exemption from the Foreign Investment in Real Property Tax Act of 1980 (FIRPTA).  (Federal Register, June 7)  The proposed rules appear to be overwhelming positive and likely to resolve most, if not all, of foreign investors’ remaining concerns.

      The Treasury Department  issued proposed tax regulations clarifying the scope and operation of the foreign pension fund exemption from the Foreign Investment in Real Property Tax Act of 1980 (FIRPTA).  (Federal Register, June 7)  The proposed rules appear to be overwhelming positive and likely to resolve most, if not all, of foreign investors’ remaining concerns.

      • FIRPTA imposes U.S. capital gains tax on the sale of a U.S. repeal property interest by a foreign investor.  FIRPTA results in a discriminatory tax on foreign investment in US real estate and infrastructure that does not apply to any other asset class.  The FIRPTA regime is an anti-competitive outlier that deflects global capital to other markets.
      • With the strong support of The Real Estate Roundtable, Congress passed in 2015 the first major reforms to FIRPTA since its enactment in 1980.  The changes included a new exemption from FIRPTA for qualified foreign pensions funds and doubled the amount a foreign interest may invest in a U.S. publicly traded REIT.  (Roundtable Weekly, Dec. 18, 2015) 
      • After passage of the 2015 PATH Act, some questions remained regarding whether certain foreign entities and arrangements would qualify for the foreign pension fund exemption.  The Roundtable encouraged Congress to clarify that the foreign pension fund definition covers a number of number of different arrangements, including:  governmental, Social Security-type plans; plans established for the self-employed; multi-employer plans; plans sponsored by political subdivisions; and situations where an entity pools retirement assets from multiple pension plans.
      • In March 2016, the Joint Committee on Taxation provided support for a broad interpretation of the FIRPTA foreign pension fund exemption with its “Blue Book” on tax legislation enacted in 2015.  (Roundtable Weekly, March 18, 2016)  In March 2018, Congress passed FIRPTA technical corrections legislation codifying many of The Roundtable’s recommendations.  (Roundtable Weekly, Mar. 23, 2018; The Blue Slip, Mar. 2018)
      • The newly proposed regulations adopt a broad view on what constitutes a qualified foreign pension fund.  According to the regulations’ preamble, “[t]he Treasury Department and the IRS have determined that the purpose of section 897(l) is best served by permitting a broad range of structures to be eligible to be treated as a qualified foreign pension fund.”  This sentiment is then extended in the proposed rules to a wide range of pension arrangements, including multi-employer and government-sponsored public pension funds, as well as retirement funds organized by trade unions, professional associations, or similar groups. 
      • Additionally, the proposed regulations confirm that entities wholly owned by multiple foreign pension funds can qualify for the exemption.  Similarly, entities can qualify for the exemption indirectly through a chain of ownership.  These were important clarifications for common foreign pension fund structures.  

      Building on the success of the PATH Act reform, The Roundtable and other stakeholders are encouraging Members of Congress to repeal FIRPTA entirely by passing the bipartisan Invest in America Act sponsored by Representatives John Larson (D-CT) and Kenny Marchant (R-TX).  (Roundtable Weekly, Apr. 12, 2019)  FIRPTA will be one of several tax topics discussed during The Roundtable’s Annual Meeting on June 11 in Washington, DC and at the Tax Policy Advisory Committee meeting on June 12.

      Senate Finance Committee Ranking Member Introduces Bill to Tax Carried Interest at Ordinary Income Rates

      Posted on by Trey Jackson

      Senate Finance Committee Ranking Member Ron Wyden (D-OR) yesterday introduced legislation to fundamentally alter the longstanding tax treatment of a profits interest in a real estate partnership. 

      Senate Finance Committee Ranking Member Ron Wyden (D-OR) has introduced legislation to fundamentally alter the longstanding tax treatment of a profits interest in a real estate partnership.

      • The Wyden proposal (detailed summary of the legislation and one-pager) would depart dramatically from prior carried interest legislation by taxing partners before any capital gain or even rental income is generated by the partnership.  For example, it would give rise to large amounts of taxable (but phantom) income for a general partner with a profits interest during the pre-construction and development phase of a real estate project.
      • The legislation would treat a profits interest in a real estate partnership as an interest-free loan from the other partners. The bill would effectively tax the partner with a profits interest annually, at ordinary income rates, on his or her deemed share of the invested capital by multiplying the deemed share by a specified interest rate (9% plus the variable yield on a corporate bond index that is currently 2.93%).  The product would be considered taxable, ordinary income.
      • In addition to taxing partners currently on non-existent, illusory income, in many cases the legislation would not allow partners to recover the taxes down the road if the project ultimately fails to produce a capital gain.  That’s because the losses would be treated as capital losses that generally are nondeductible against ordinary income. 
      • General partners are currently taxed at ordinary income rates on their management fees and other income that is compensatory in nature.  Partners owe tax on any guaranteed payments for services provided.  Under the Wyden bill, however, a real estate entrepreneur would be taxed today on a partnership’s invested capital-capital at risk-irrespective of whether the project will ever generate income.  

      • The  Real Estate Roundtable opposes both Senate and House carried interest proposals. General partners earning a carried interest in a real estate partnership bear significant risks beyond direct capital contributions. These risks can include funding predevelopment costs, guaranteeing construction budgets and financing, and exposure to potential litigation over countless possibilities. 

      • Senator Wyden’s bill came just days after a televised interview in which President Trump indicated he still intends to address the carried interest issue.  (FOXBusiness, May 20).  “If President Trump wants to address carried interest and make the tax code more fair, he’ll be happy to support my new proposal,” said Sen. Wyden. (Wyden news release, May 23) 
      • Other legislative proposals to reform the taxation of carried interest were introduced in March by Sen. Tammy Baldwin (D-WI) and House Ways and Means Committee member Bill Pascrell, Jr. (D-NJ).  (News releases: Baldwin and Pascrell)
      • The Roundtable and 13 other national real estate organizations sent a letter to members of the House Ways and Means Committee on March 26 about the adverse impact that the Baldwin-Pascrell legislation (H.R. 1735) would have on U.S. real estate and entrepreneurial risk taking.  (Roundtable Weekly, March 29)  
      • The letter notes how the bill would result in a huge tax increase on Americans who use partnerships in businesses of all types and sizes – and would be particularly harmful to the nearly 8 million partners in U.S. real estate partnerships.  
      • The March 26 letter states, “The false narrative surrounding the carried interest issue is that it targets only a handful of hedge fund billionaires and Wall Street executives.  The carried interest legislation is far broader and would apply to real estate partnerships of all sizes-from two friends owning and leasing a townhome to a large private real estate fund with institutional investors.” 

      The Real Estate Roundtable opposes both Senate and House carried interest proposals.  General partners earning a carried interest in a real estate partnership bear significant risks beyond direct capital contributions. These risks can include funding predevelopment costs, guaranteeing construction budgets and financing, and exposure to potential litigation over countless possibilities.

      GOP Leaders Considering Legislation to Make Recent Tax Cuts Permanent; House Speaker Paul Ryan Announces Retirement, Endorses Majority Leader Kevin McCarthy

      Posted on by Trey Jackson

      House and Senate GOP leaders signaled this week they intend to pursue legislation that would make permanent the individual tax provisions enacted as part of the Tax Cuts and Jobs Act (P.L. 115-97) enacted last December (Roundtable Weekly, Dec. 22, 2017)

      House Majority Leader Kevin McCarthy (R-CA), left, and House Ways and Means Committee Chairman Kevin Brady (R-TX) discussed the impact of  recent tax reform; a possible phase 2 effort; the recent resignation of House Speaker Ryan; and the endorsement of McCarthy as his successor on  CNBC’sSquawk on the Hill  .

      Under current law, many of the individual provisions – including the lower effective tax rate on pass-through business income – will sunset after 2025.  Although the nonpartisan Congressional Budget Office (CBO) projected last week that the tax bill would add 1.9 trillion dollars to the national debt over a decade, making permanent the cuts that lapse after 2025 could add an additional 1.5 trillion over the next decade, according to a Tax Foundation analysis.  (Roundtable Weekly, April 13 and Reuters, April 17)
       
      House Speaker Paul Ryan (R-WI) on Tuesday said, “We fully intend to make these things permanent, and that’s something we’ll be acting on this year.” (Reuters, April 17).  Senate Majority Leader Mitch McConnell (R-KY) added, “If they are interested in making the individual rates permanent that’s something we ought to take a look at. I don’t know why we wouldn’t want to do that” (Politico, April 17)
       
      In addition to making the individual provisions permanent, House Ways and Means Committee Chairman Kevin Brady (R-TX) has also floated making immediate business expensing permanent, among other changes. (Bloomberg, March 28 and Miller & Chevalier, DC TaxFlash, April 17)
       
      Although prospects for passing what President Trump calls a “phase-two” tax cut bill in the House are possible, a Senate bill would require 60 votes for passage, which Democrats could prevent in the closely divided chamber.  (CNBC, April 5)
       
      Brady and House Majority Leader Kevin McCarthy (R-CA) on Tuesday discussed the impact of  recent tax reform; a possible phase 2 effort; the recent resignation of House Speaker Ryan; and the endorsement of McCarthy as his successor on CNBC’s Squawk on the Hill .
       
      After recently announcing his retirement from Congress when the current legislative session ends in early 2019, Ryan declared his support for McCarthy as the next GOP House Speaker. (Deloitte, April 13 and ABC News, April 13) 
       
      The next GOP House Speaker candidate must get 218 votes in a floor vote, which gives the 30-member conservative House Freedom Caucus leverage to propose one of their members for a leadership position.  Such negotiations will be irrelevant if Republicans lose the House in the 2018 midterm elections. (USA Today, April 18)