On August 19, The Roundtable submitted an amicus brief to the Fifth Circuit Court of Appeals in Sirius Solutions v. Commissioner, a pivotal case that could redefine the tax obligations of limited partners under the self-employment tax in the Self-Employed Contributions Act (SECA). (Amicus Brief)

Why It Matters

• There are more than 441,000 limited partnerships in the U.S., with over 10 million partners. Nearly half of these limited partnerships are real estate partnerships.

• If the IRS position prevails, it could result in widespread tax increases on real estate limited partners who provide some services to the business and effectively raise the tax burden on real estate investments.

• The IRS’s position would requires limited partners to be “passive investors” to qualify for the exemption from the 3.8% SECA tax under Section 1402(a)(13).

Roundtable Amicus Brief

• The Roundtable’s amicus brief argues that the IRS’s interpretation is flawed, pointing to decades of state law that allows limited partners to provide services and still retain their status.

• The brief emphasizes that pre-1977 state court decisions and the IRS’s own 1994 proposed regulations contradict the government’s position that limited partners must be passive to avoid SECA taxes.

• The Tax Court’s imposition of the passive investor test is found nowhere in the statute and rests on a fundamental misunderstanding of state laws that Roundtable members and others have relied on for decades.  

• Ignoring an established body of partnership law, the IRS is relying on a recent Tax Court decision, Soroban, that imposes a judge-made test requiring a limited partner to be a “passive investor.” The Roundtable believes this fundamental error should be reversed. 

What’s Next

• The Fifth Circuit’s ruling in Sirius will set a precedent for future SECA tax cases, with significant consequences for real estate and other industries that use limited partnerships for business purposes.

• A successful outcome in the Sirius case could reduce the likelihood that the government moves forward with formal tax guidance that expands the reach of SECA taxes.    

The Roundtable remains committed to protecting entrepreneurs’ ability to flexibly organize in partnerships and other pass-through entities that promote capital formation, risk-taking, and economic growth, and it will remain engaged as the SECA dispute moves forward.   

The Real Estate Roundtable’s Q3 2024 Sentiment Index, which measures commercial real estate executives’ confidence and expectations about the industry environment, suggests a growing confidence in the future of the commercial real estate market despite ongoing challenges.

Roundtable View

• The Q3 Sentiment Index reported an overall score of 64, reflecting an increase of three points from the previous quarter, and the Future Index at 70, up four points from the previous quarter.

• Roundtable President and CEO Jeffrey DeBoer said, “The increase in our Q3 Sentiment Index indicates that while uncertainty remains, the industry is gradually regaining confidence. Leaders are seeing signs of stabilization in asset values and a potential improvement in the availability of capital, which are encouraging signals as we navigate this complex environment.”

• This rise in sentiment marks an 18-point increase in the overall score since last year.

• He added, “The results of the report reflect the resilience of the commercial real estate industry. The fact that a majority of executives expect better conditions in the coming year is a strong signal that although serious challenges remain, the worst may be behind us.”

Topline Findings

• All indices of The Roundtable’s Q3 Index are up, compared to the previous quarter and one year ago. The Index is scored on a scale of 1 to 100 by averaging the scores of Current and Future Economic Sentiment Indices. Any score over 50 is viewed as positive.

• The Q3 2024 index registered an overall score of 64, an increase of three points over the previous quarter. The Current Index registered 59, a four-point increase over Q2 2024. The Future Index posted a score of 70 points, an increase of four points from the previous quarter, indicating that uncertainty surrounding the future of asset values and availability of capital persists, but has lessened.

• In Q3 2023, the Overall Index registered at 46, while the Current Index registered at 33, reflecting a notable 26-point gain in the Q3 2024 Current Index compared to the previous year.

• Evolving market trends continue to shape the real estate landscape. A majority (70%) of Q3 survey participants expect general market conditions to show improvement one year from now. Additionally, 48% of respondents said conditions are better now compared to this time last year. Only 6% of Q3 participants expect general market conditions to be somewhat worse in a year, a decrease from 11% in Q2.

• Some subsector asset classes, such as data centers and student housing, are well-positioned from both a fundamentals and capital availability perspective. However, Class B office properties continue to face ongoing challenges, and the fast pace of multifamily and industrial rent growth has subsided.

• A significant 88% of Q3 survey participants expressed optimism that asset values will be higher (57%) or the same (31%) one year from now, indicating some semblance of expected stability. 76% of Q3 survey participants believe asset values are slightly lower (50%) or about the same (26%) today compared to a year ago.

• The real estate capital markets landscape remains challenging. However, 71% of respondents believe the availability of equity capital will improve in one year, while 60% said the availability of debt capital will improve in one year. 40% of participants said the availability of debt capital would be the same or worse in one year, an increase from 36% who voiced the same expectation in Q2 of this year.

Data for the Q3 survey was gathered by Chicago-based Ferguson Partners on The Roundtable’s behalf in July. Read the full Q3 report.

On August 27, the U.S. Department of Energy announced plans to allocate $240 million from the Inflation Reduction Act (IRA) to 19 state and local governments to help communities adopt energy-efficient building codes and retrofit structures to meet updated standards. (Politico, Aug. 27)

Key Details

• The initiative is expected to reduce utility costs for multifamily residents and commercial building operators, enhance grid resilience, and lower emissions.

• “DOE is helping jurisdictions move further and faster in implementing stronger codes that will provide Americans safer, healthier, and more comfortable places to live, work, and play,” said U.S. Secretary of Energy Jennifer Granholm. (US-DOE Press Release, Aug. 27)

• The 19 selected projects will receive direct technical assistance to support the adoption and implementation of traditional energy codes, zero energy codes, and building performance standards.

• The grants also align with the Justice40 Initiative, designed to direct 40% of federal investments to disadvantaged communities overburdened by pollution.

• This latest announcement follows an initial $90 million awarded to 27 projects last year from the 2021 Infrastructure Investment and Jobs Act, commonly known as the bipartisan infrastructure law, to implement updated building codes. (Politico, Aug. 27)

• Chosen jurisdictions must go through a “negotiation process” with US-DOE before the agency ultimately awards Round 1 grants. Applications for the second round of IRA funding will close on Sept. 13. (US-DOE Press Release, Aug. 27)

What’s Next

• Building Performance Standards (BPS) laws have the potential to drive significant environmental benefits, but only if they are thoughtfully designed and implemented.

The Roundtable is developing a “primer” for real estate stakeholders, highlighting key issues in the state and local BPS trend, with a release planned for this fall.