News Type: Roundtable Weekly

Treasury Releases Guidance on New Business Interest Deduction Limit, but Questions for Real Estate Investment Remain

Posted on by Trey Jackson

On Monday, the Treasury Department and the Internal Revenue Service (IRS) released Notice 2018-28, which provides guidance on the new limitation on the deductibility of business interest, (Section 163(j)), enacted in the Tax Cuts and Jobs Act.

In the Feb. 21 letter the Roundtable asked Treasury to clarify     that interest on debt incurred by an owner to fund an investment in a partnership or other entity engaged in a real property trade or business, constitutes interest on debt properly allocable to that real estate business  . 

The Notice focuses on interest expense carryforwards from prior years, corporate interest deductions, and consolidated corporate groups, while leaving unresolved certain key questions for real estate investors.  Taxpayers can rely on the guidance at least until proposed regulations are issued.

In general, for taxpayers with revenue over $25 million, the Tax Cuts and Jobs Act capped the amount of business interest that a business can deduct annually to no more than 30 percent of earnings before interest, taxes, depreciation, and amortization.  The provision includes several exceptions, including an exception critical to real estate for an “electing real property trade or business.”  

Notice 2018-28 addresses a concern that partners in partnerships could effectively double-count certain interest income when calculating the limitation on partner-level borrowing.  Other highlights of the Notice include:

  • Carryforward of interest expense.  The Notice states that forthcoming regulations will allow taxpayers with disqualified interest under the old law to carry forward such interest as business interest under the new law.  Such interest could be disallowed under the new limitation in the same manner as any other business interest. 

  • Corporate business interest.  The Notice clarifies that interest paid by a C corporation is business interest for purposes of the interest limit.  Forthcoming regulations will address whether and when interest paid by a partnership, including a partnership with a corporate partner, should be treated as business interest for the corporate partner. 

  • Consolidated groups.  The Notice confirms that the business interest limit properly applies at the level of a consolidated group.  Forthcoming regulations will address how the interest limit applies to a consolidated group when one of the members is an electing real property trade or business, and to a consolidated group in which a member holds an interest in a partnership that is engaged in a real property trade or business.

  • Earnings and profits.  The Notice clarifies that a disallowed business interest deduction will not affect whether or when the interest expense reduces a C corporation’s earnings and profits.

For real estate investors, however, the Notice leaves unanswered some of the key issues related to the financing of real estate.  For example, The Real Estate Roundtable has asked Treasury to clarify that interest on debt incurred by an owner to fund an investment in a partnership or other entity engaged in a real property trade or business, constitutes interest on debt properly allocable to that real estate business (Comment Letter, Feb 23; Roundtable Weekly, Feb. 23).

The Treasury Department and the IRS are expected to issue additional guidance and regulations in the future, and request comments on the rules described in the notice and what additional guidance should be issued to assist in computing the business interest expense limitation under Section 163(j). (IRS, April 2)

Depending on the outcome of the rule-making process, the new limitation on business interest expense (Section 163(j)) could have significant implications for real estate markets and the financing of real estate transactions.  Clarifying the rules for real estate in the context of tiered arrangements will help avoid potential disruptions.

The Roundtable and TPAC will continue to play an active role in seeking appropriate clarifications affecting the most significant changes to the tax code.

Trump Administration Announces Tariffs on China Imports; China Responds Swiftly With Similar Duties Targeting American Imports

Posted on by Trey Jackson

On Thursday, President Trump escalated ongoing trade tensions with China by instructing U.S. trade officials to consider tariffs on an additional 100 billion dollars in imports from China, in addition to the tariffs issued earlier this week— totaling 150 billion dollars in Chinese imports across 1,300 categories of products.  This action prompted a swift response from the Chinese government, with import levies on American soybeans, cars, chemicals and airplanes. (The Washington Post, April 4)

President Trump escalated ongoing trade tensions with China by instructing U.S. trade officials to consider tariffs on an additional 100 billion dollars in imports from China, in addition to the tariffs issued earlier this week— totaling $150 billion in Chinese imports.

This decision by President Trump comes a month after he authorized levies of 25 percent on imported steel and 10 percent on aluminum, while exempting Canada, Mexico and potentially other countries, based on a country-by-country review of bilateral security agreements. President Trump justified the tariffs by citing alleged violations of U.S. intellectual property laws and unbalanced trade practice. (Roundtable Weekly, March 9)

Roundtable President and CEO Jeffrey DeBoer noted the commercial real estate industry’s concerns, stating, “These proposed tariffs, coupled with the earlier tariffs on steel and ongoing dispute with China could have unfortunate and unintended effects on the U.S. economy by raising construction costs, and reducing jobs in real estate development.  China has continually taken advantage of trade practice laws, particularly intellectual property—vital for the U.S. to continue developing new technology, whether it be machinery, software, or energy efficient building solutions and should be held accountable but in a measured way.” (The Washington Post, April 5)

Since the announcement last month, along with the addition of more tariffs this week, U.S. and global market volatility show no signs of letting up, leaving two of the world’s largest economies on the brink of a possible trade war that could negatively impact U.S. agriculture and industry.

Newly appointed National Economic Council  Director and Assistant to the President for Economic Policy, Larry Kudlow, said that he expected the U.S. and China to resolve their issues, noting that the announcements by both countries where just “proposals.” (Financial Times, April 5)

Kudlow, who comes to the Trump administration as a former Wall Street economist, CNBC commentator and advocate of free trade, still believes that the U.S. can strike a deal with China—anticipating continued trade will eventually lead to faster growth and higher wages in the U.S. (Politico, April 4; BNA, April 6)

Commerce Secretary Wilbur Ross echoed Kudlow’s reassurance, noting that the U.S. tariffs won’t take effect before the end of May, after a period for public comment, and that the administration may seek to resolve the trade dispute at the bargaining table. The next opportunity for both parties to discuss the ongoing dispute will be later this month at the meeting of the International Monetary Fund and World Bank and in Washington, D.C. (The Washington Post, April 4; Reuters, April 4)

House Considers Changes to Senate-Passed Dodd-Frank Reform Bill That Includes Roundtable-Backed HVCRE Provision

Posted on by Trey Jackson

The House of Representatives is considering adding changes to bipartisan Dodd-Frank reform legislation (S. 2155) passed last week by the Senate that includes a Roundtable-supported measure to reform the Basel III High Volatility Commercial Real Estate (HVCRE) Rule.  (Roundtable Weekly, March 16)

House Republicans and Financial Services Committee Chairman Jeb Hensarling (R-TX) are motivated to push for more changes to the Senate bill in an effort to rollback more financial industry rules in the Dodd-Frank Act.

House Republicans, led by Financial Services Committee Chairman Jeb Hensarling, (R-TX) are motivated to push for more changes to the Senate bill in an effort to rollback more financial industry rules in the Dodd-Frank Act.

Proposals approved by the committee on Wednesday include a change to the Volcker Rule that would put the Federal Reserve in charge of enforcing the Dodd-Frank Act ban on proprietary trading – instead of the five agencies now assigned to the task.  (BNA, March 21)

Substantive changes to the “Volcker Rule” and other provisions by the House would likely send an amended bill back to the Senate, which could threaten support by Senate moderates and require a legislative conference between the two chambers.  (NREI, March 21)

The HVCRE measure included in the Senate-passed Economic Growth, Regulatory Relief, and Consumer Protection Act originally was introduced in the House as the Clarifying Commercial Real Estate Loans bill (H.R. 2148).  An identical HVCRE measure was then included in the Senate bill (S. 2405) that passed March 14.  

The Roundtable-supported HVCRE text would modify the current, overly broad Rule by providing bank lenders with more specific requirements for acquisition, development, or construction (ADC) loans. These reforms to HVCRE loan definitions would provide greater assurances for performing loan portfolios with low risk, bolster credit capacity and preserve economically responsible commercial real estate lending. (Roundtable Weekly, Jan. 12).

HVCRE reform has been a top policy priority of The Real Estate Roundtable and its industry coalition partners, who have submitted numerous policy comment letters to policymakers since 2015. The Roundtable’s HVCRE Working Group has also played a key role in advancing these specific reforms. (Roundtable letter, March 2)

 

Dodd-Frank Reform Legislation Includes Measure to Modify Banking Rule Affecting Acquisition, Development, or Construction Loans; Congressional Votes Next Week

Posted on by Trey Jackson

The Senate is expected to vote early next week on bipartisan Dodd-Frank reform legislation (S. 2155) that includes a Roundtable-supported  measure to reform the Basel III High Volatility Commercial Real Estate (HVCRE) Rule, which would clarify specific requirements for acquisition, development, or construction (ADC) loans.

The Senate is expected to vote early next week on bipartisan Dodd-Frank reform legislation (  S. 2155  ) that includes a Roundtable-supported  measure to reform the Basel III High Volatility Commercial Real Estate (HVCRE) Rule, which would clarify specific requirements for acquisition, development, or construction (ADC) loans.

The Economic Growth, Regulatory Relief, and Consumer Protection Act(S. 2155) represents the most significant change to financial regulatory law since 2010, when the Dodd-Frank Act was enacted. Among the financial issues it addresses, the Act would raise the amount at which banks are considered “too big to fail” – from the current $50 billion threshold to $250 billion – and provides additional relief for community banks and credit unions.

Amendments added this week to the Manager’s Amendment for S. 2155 include a bipartisan  HVCRE measure that originated in the U.S. House of Representatives as the Clarifying Commercial Real Estate LoansHVCRE bill (H.R. 2148), introduced by House Financial Services Committee members Rep. Robert Pittenger (R-NC) and Rep. David Scott (D-GA). After passing the House by voice vote in November of last year (Roundtable Weekly, Nov. 10), the Senate Banking Committee took up an identical bill in February – S. 2405 – co-sponsored by Senators Tom Cotton (R-AR) and Doug Jones (D-AL). 

Last Friday, the Roundtable and twelve other real estate organizations sent a comment letter urging all members of the Senate Banking Committee to take the necessary steps to enact S. 2405 by including the measure in the broader Dodd-Frank reform package (S. 2155).

The current HVCRE Rule is overly broad and includes many stabilized loans without construction risk in this HVCRE category, unduly burdening those loans with capital charges meant to protect banks from heightened construction risks. As a result, banks, including small community financial institutions, have been deterred from making this type of loan, which can represent up to 50 percent of a small bank loan portfolio.   

The Roundtable and twelve other real estate organizations sent a  comment letter  urging all members of the Senate Banking Committee to take the necessary steps to enact S. 2405 by including the measure in the broader Dodd-Frank reform package (S. 2155).

The Senate’s HVCRE measure would clarify which types of loans should be classified as HVCRE loans to ensure they do not impede credit capacity or economic activity, while still promoting economically responsible commercial real estate lending.  (Roundtable Weekly, Jan. 12).

Senate Banking Committee Chairman Mike Crapo (R-ID) and House Financial Services Committee Chairman Jeb Hensarling (R-TX) continue to work with their colleagues to advance bipartisan reform measure that will muster enough votes for passage in both chambers. 

It remains uncertain whether Crapo’s efforts will attract the support of House Republicans, who must approve the bill before it can be sent to the President for his signature.  Hensarling said yesterday that the updated Senate bill doesn’t go far enough and needs more provisions to reflect “the will of the House.” (BNA, March 9)

HVCRE reform is a is a top policy priority of The Real Estate Roundtable and its industry coalition partners, who have submitted numerous letters to policymakers since the measure was enacted in 2015. The Roundtable’s HVCRE Working Group played a critical role in drafting the measure and aiding efforts to advance legislative reforms. (Roundtable letter, March 2)

Financial regulation and its effect on commercial real estate lending will be a focus of The Roundtable’s April 25 Spring Meeting in Washington, DC.

Real Estate Industry Urges Supreme Court to Expand States’ Authority to Collect Taxes on E-Commerce Purchases

Posted on by Trey Jackson

The Roundtable joined an industry coalition in filing an amicus curiae brief on March 5 with the U.S. Supreme Court in South Dakota v. Wayfair, Inc., No. 17-494 – a case that addresses the constitutionality of states’ authority to collect sales and use taxes on Internet consumer purchases. (SCOTUSblog)  

  The Roundtable joined an industry coalition in filing an amicus curiae brief  on March 5 with the U.S. Supreme Court in South Dakota v. Wayfair, Inc., No. 17-494  – a case that addresses the constitutionality of states’ authority to collect sales and use taxes on Internet consumer purchases.

After the high Court accepted Wayfair in January, the case has become the long-awaited judicial vehicle that may level the playing field between Internet-based retailers and “brick and mortar” stores.  The industry amicus brief, drafted by former U.S. Solicitor General Seth Waxman and his colleague Ari Holtzblatt, urges the Supreme Court to overturn a pair of decades-old decisions (e.g., Quill Corp. v. North Dakota (1992) and National Bellas Hess, Inc. v. Department of Revenue of Illinois (1967).  Wayfair directly challenges these pre-Internet opinions, which prohibit states from imposing tax collection obligations on web-based, catalog, and other retailers that lack an in-state physical presence.

In today’s e-commerce driven world, the brief notes, the law should focus on retailers’ economic rather than physical presence, and level the playing field for all retailers who have in-state sales above a certain threshold.

The brief explains how the outmoded court decisions continue to have damaging effects that reach far beyond actual brick-and-mortar outlets. “First, the loss of physical stores, many of which are integral to the social fabric of their communities, increases unemployment and creates a sense of dislocation among community residents. Second, the decline in the retail sector reduces the value of retail real estate, discourages further development of retail properties, and impedes innovation in the retail sector. Third, the lost revenue from sales, property, and income taxes threatens the ability of state and local governments to provide much-needed public services, including those that benefit online retailers,” the brief states.

The Roundtable joined The International Council of Shopping Centers, Investment Program Association, Nareit®, the National Association of REALTORS® , the National Multifamily Housing Council, NAIOP, the American Farm Bureau Federation and the South Dakota Farm Bureau Federation on the amicus brief, which re-iterates many points set forth by a real estate coalition in an initialamicus  brief filed last November. (Roundtable Weekly, Nov. 3, 2017)

Trump Administration Solicitor General Noel Francisco also joined the wave of other submissions to SCOTUS on March 5.  The Justice Department brief states, “In light of internet retailers’ pervasive and continuous virtual presence in the states where their websites are accessible, the states have ample authority to require those retailers to collect state sales taxes owed by their customers.”  (Amicus brief of USA and Wall Street Journal, March 5)

SCOTUS is scheduled to hear oral argument on April 17 and is expected to render a decision by the end of June. (Roundtable Weekly, Jan. 12)

President Trump Authorizes Tariffs on Imported Steel and Aluminum; Exemptions for Canada, Mexico and Potentially Other Countries After Security Reviews

Posted on by Trey Jackson

Despite pushback from GOP leaders, congressional members and allies overseas, President Trump yesterday authorized levies of 25 percent on imported steel and 10 percent on aluminum to take effect March 23, while exempting Canada, Mexico and potentially other countries based on a country-by-country review of bilateral security agreements.  (MarketWatch, March 8 and Bloomberg, March 9)

President Trump authorized levies of 25 percent on imported steel and 10 percent on aluminum. 

The Presidential Proclamation exempts Canada and Mexico based on renegotiation of terms in the North American Free Trade Agreement (NAFTA) and includes a degree of flexibility for exempting other nations.

Roundtable President and CEO Jeffrey DeBoer noted the commercial real estate industry’s concerns, stating “For every job in the steel production industry, there are more than 50 jobs in the US construction industry (140,000 vs. 7-10 million). New tariffs on construction materials like steel could have the unfortunate, unintended side effect of raising construction costs and reducing jobs in real estate development. Exemptions will be important to mitigating the harm to the US economy.”

In response to Trump’s initial tariff announcement last week, Senate Majority Leader Mitch McConnell (R-KY) commented on Tuesday, “There is a lot of concern among Republican senators that this could sort of metastasize into a larger trade war.” (NPR, March 8)

Roundtable President and CEO Jeffrey DeBoer: “New tariffs on construction materials like steel could have the unfortunate, unintended side effect of raising construction costs and reducing jobs in real estate development. Exemptions will be important to mitigating the harm to the US economy.”

A March 7 letter to Trump from 107 House Republicans, including Ways and Means Chairman Kevin Brady, expressed concern that “adding new taxes in the form of broad tariffs would undermine” the economic benefits in recently-passed Tax Cuts and Jobs Act legislation. The letter also suggests conditions for imposing tariffs to minimize negative consequences.  

European Central Bank (ECB) President Mario Draghi said in a news conference yesterday, “If you put tariffs against what are your allies, one wonders who the enemies are.”  Discussing the potential effects of the tariffs, he added, “Is there going to be a retaliation or not? What’s going to be the response of the exchange rate? …and the effect on confidence is very difficult to assess.” (CNBC, March 8)

The tariff announcement comes after a recent White House infrastructure proposal that seeks to leverage $200 billion in federal funding to leverage $1.5 trillion in local, state and private funding over the next decade. Higher tariffs on imported steel and aluminum could present new challenges to obtain the raw materials needed for extensive infrastructure projects.  Funding options for the Trump administration’s infrastructure proposal were discussed during a March 6 House Transportation and Infrastructure Committee that featured Transportation Secretary Elaine Chao. (Hearing, March 6)

“Visit U.S. Coalition” Unveils Policy Goals to Encourage Foreign Tourism and Boost Job Growth

Posted on by Trey Jackson

The multi-industry Visit U.S. Coalition (which includes The Real Estate Roundtable) on Wednesday released its policy agenda aimed at promoting and increasing inbound international travel to the United States. (VisitU.S.Policy Agenda, Feb. 28)

The multi-industry Visit U.S. Coalition  (which includes The Real Estate Roundtable) on Wednesday released its policy agenda aimed at promoting and increasing inbound international travel to the United States. ( VisitU.S. Policy Agenda , Feb. 28)  

The coalition advocates for policies that urge the Trump Administration and Congress to regain the nation’s lost share of the global travel market by 2020, which will result in 88 million international visitors who directly support 1.3 million U.S. jobs and $294 billion in travel exports – crucial to achieving the Administration’s economic goals. (Roundtable Weekly, Jan. 19 and Feb. 9)
 
“Robust international travel helps to power the U.S. commercial real estate markets, not only hospitality properties but retail, attraction, health and investment properties as well,” said Jeffrey D. DeBoer, President and CEO of The Real Estate Roundtable.  “We look forward to continuing to work to emphasize that America is a uniquely welcoming, interesting and safe travel destination for international visitors.  Positive national tourism policies boost overall economic growth, support and create jobs, generate revenues to help modernize our infrastructure, and generally improve the quality of life in our communities,” DeBoer added.
 
The coalition aims to safely and securely welcome more overseas travelers to the U.S. – who stay an average of 18 nights and spend approximately $4,360 at hotels, stores, restaurants and attraction properties on business and leisure trips. The coalition’s agenda encourages federal policy makers to:

  • Embrace International Travel to the U.S. as a National Priority
  • Expand Intelligence Sharing and Streamline the Travel Entry Process
  • Make America’s Visa System More Secure and Accessible to International Travelers
  • Increase Security and Efficiency in America’s Travel Screening Systems at U.S Ports of Entry

Led by the U.S. Travel Association and the American Hotel and Lodging Association, the coalition also includes the U.S. Chamber of Commerce and the American Resort Development Association.

NLRB Restores Broad, Obama-Era “Joint Employer” Standard; Industry Coalition Calls for Congress to Pass Unified National Definition

Posted on by Trey Jackson

A conflict of interest by a newly-appointed member of The National Labor Relations Board (NLRB) prompted the agency on Monday to restore a 2015 ruling that renders employers vulnerable to claims by “indirect” workers who are not immediate hires – a move with significant implications that again subjects hotels, other franchise-model businesses, and companies that hire contractors to an expansive “joint employer” liability standard.

With Browning-Ferris  revived, an expanded, vague test – based on “indirect ” and “ potential ” control over workers’ terms and conditions of employment – will replace a more predictable and clear “direct and immediate control” standard for determining joint employer liability.

Last December, the NLRB issued its decision in Hy-Brand Industrial Contractors, Ltd. , which overturned the Obama-era “joint employer” standard announced in Browning-Ferris Industries of California, Inc.  (Roundtable Weekly, Dec. 15, 2017)  With Hy-Brand now vacated – because the board’s inspector general recommended that a Trump appointee who previously worked for a law firm that represented one of the companies in Browning-Ferris should have recused himself – the 2015 decision is back in effect.

The withdrawal of Hy-Brand creates an uncertain and complicated legal landscape for ongoing franchise-related cases. (New York Times, Feb. 26) 

With Browning-Ferris revived, an expanded, vague test – based on “indirect” and “potential” control over workers’ terms and conditions of employment – will replace a more predictable and clear “direct and immediate control” standard for determining joint employer liability.  The decision exposes a broad range of contractors and subcontractors, and franchisors and franchisees, to workplace liability for another employer’s actions and a potential obligation to collectively bargain with workers they have not directly hired.  (Wall Street Journal, Dec. 14.)

As the NLRB’s action vacating Hy-Brand demonstrates, congressional action could  definitively address the joint employer standard and insulate the issue from whichever party has enough appointees to swing the majority on the highly politicized labor board.  The House of Representatives in November 2017 passed the Save Local Business Act (H.R. 3441), which would codify the “direct and immediate control” standard when deeming employers liable for workplace violations.

A multi-industry coalition, including The Real Estate Roundtable, on Feb. 15 wrote Senate leaders urging them to take up H.R. 3441 as soon as possible to provide certainty for small business owners and other employers in all industries, while clarifying protections for American workers.

President Trump’s Plans to Slap Global Tariffs on Imported Steel and Aluminum Spark Concerns Regarding Real Estate and Infrastructure Investment

Posted on by Trey Jackson

President Trump yesterday said he will sign a formal order next week imposing tariffs of 25 percent on imported steel and 10 percent on aluminum for “a long period of time” – an act that could raise domestic construction costs and create new challenges for real estate development and infrastructure projects. (White House Remarks, March 1)

President Trump yesterday said he will sign a formal order next week imposing tariffs of 25 percent on imported steel and 10 percent on aluminum.

Roundtable President and CEO Jeffrey DeBoer voiced concern about how such a broad international penalty could rebound against the domestic commercial real estate industry. “In the United States, forty-two percent of steel is consumed by the construction industry, which employs millions of Americans directly and millions more indirectly,” said DeBoer.  “Aluminum is also a key material used in energy efficient building construction.  The current healthy state of the U.S. commercial real estate industry could be hard hit with the unintended consequences from such broad penalties targeting metals essential to construction. Tariffs will lead to higher construction costs that make many new projects simply uneconomic and unviable — hurting investment and job creation,” DeBoer noted.
 
Trump’s announcement, made during a White House meeting with U.S. metals industry executives, sparked a bout of stock market volatility and immediate responses from Canada and the European Union promising “countermeasures” to “rebalance” international trade with  the U.S.  
 
Federal Reserve Chairman Jerome Powell, following testimony this week before the House and Senate, said, “The best approach is to deal directly with the people who are affected, rather than falling back on tariffs.” (Wall Street Journal, March 1)
 
According to an analysis by the Cato Institute, more than 200 anti-dumping and countervailing duty orders aimed at preventing unfair competition currently constrain U.S. imports of steel and iron products from a long list of countries. The effect has been an increase in U.S. prices well above global levels to the detriment of the large manufacturing and construction sectors in America that use steel to make higher-value products. (CATO Institute, CNN Commentary, Aug. 2, 2017 and Engineering News-Record, Feb. 22, 2018)
 
The impact of tariff penalties on President Trump’s recent infrastructure proposal are uncertain. Transportation Secretary Elaine Chao yesterday testified before a Senate committee about the Administration’s infrastructure plan, which emphasizes policies to lower project costs and reduce project delays.  Higher tariffs on steel – a material necessary to build and repair bridges, tunnels, pipelines, and rail lines – could further constrain the federal state, local and private funding sources touted by the Administration as necessary to finance U.S. infrastructure repair and modernization.  (Bloomberg, March 1)
 
Infrastructure and national policies affecting economic growth will be discussed during The Roundtable’s Spring Meeting on April 25 in Washington, DC.

Roundtable Proposes Framework for Implementing the Real Estate Exception to the New Business Interest Deduction Limit

Posted on by Trey Jackson

The Real Estate Roundtable on Wednesday wrote to Treasury Secretary Steven Mnuchin regarding the new limitation on business interest deductibility created in the Tax Cuts and Jobs Act, including rules that allow taxpayers to continue fully deducting interest related to commercial real estate debt. (Roundtable letter, Feb. 21)

The Feb. 21 Roundtable letter urges that Treasury clarify that interest (other than investment interest) on debt that is allocable to an owner of an entity engaged in a real property trade or business is exempt from the new business interest limitation rule – if that trade or business has elected out of the rule.

The exception for interest allocable to a real property trade or business reflects policymakers’ understanding that limits on the deduction for interest expense could have enormous negative consequences for property values, real estate markets, and economic growth.  (Reference: Real Estate Forum, Jan/Feb 2018, Decoding The New Tax Bill)

The Feb. 21 comment letter requests clarification to ensure the real estate exception operates as intended for common real estate ownership arrangements – focusing on the scope and application of the exception for an electing real property trade or business. 

The letter urges that Treasury clarify that interest (other than investment interest) on debt that is allocable to an owner of an entity engaged in a real property trade or business is exempt from the new business interest limitation rule – if that trade or business has elected out of the rule.  

As relevant examples, the letter describes four common scenarios where the financing of a real property trade or business occurs through a tiered structure.  The letter demonstrates why treating the interest expense of an upper-tier entity as properly allocable to the real property trade or business of a lower-tier entity is consistent with the legislative intent and conforms with existing tax rules and principles.  

The letter also addresses the allocation of indebtedness within entities, requesting that Treasury guidance apply the tracing rules found in existing authorities, which are already used for purposes of the passive loss rules.  

During a Feb. 20 tax conference, both Treasury’s Deputy Tax Legislative Counsel Krishna Vallabhaneni and Deputy Assistant Secretary for Tax Policy Dana Trier said a notice on language limiting interest expenses under the new tax law will be issued soon. (Bloomberg Law, Feb. 20).  

This week’s letter is a follow-up to a Jan. 18 Roundtable letter, which identified several areas where Treasury rulemaking would reduce uncertainty and facilitate continued investment. [Roundtable Weekly, Jan. 19]   

As Treasury and Congress continue to focus on implementation and technical corrections to the new tax law, The Roundtable and TPAC will play an active role in seeking appropriate clarifications affecting the most significant changes to the tax code in more than three decades.