Tag: Tax Policy

IRS Proposes Favorable New Rules for Like-Kind Exchanges

Posted on by Trey Jackson
IRS building in Washington DC

The IRS on June 11 released proposed regulations for like-kind exchanges under section 1031 that implement changes enacted in the Tax Cuts and Jobs Act (TCJA) of 2017.  TCJA restricted section 1031 to exchanges of “real property.”  The proposed rules would provide a favorable definition of “real property” and establish a safe harbor for certain personal property received in an exchange. 

  • Like-kind exchange rules allow taxpayers to defer capital gains tax when they exchange property held for investment or business use for another property of a “like kind.”  
  • Ryan McCormick, senior vice president and counsel at The Real Estate Roundtable, described in Bloomberg  Tax (June 11) why real estate like-kind exchanges are critical in the current environment: “Like-kind exchanges are even more important during periods of economic stress, like today, when traditional financing is less reliable.”
  • TPAC Member Richard Lipton (Baker McKenzie LLP) noted favorable aspects of the proposed rules, “It’s a very broad definition and many practitioners will be happy with the inclusion of inherently permanent structures being broadly defined, and also the inclusion of certain intangible property,” Lipton said.  (Bloomberg Tax, June 11).
  • Under TCJA, items like machinery, equipment, vehicles, artwork, collectibles, and patents no longer qualify for deferral under section 1031, but exchange treatment remains available for real property, including “land and generally anything built on or attached to it.” (IRS New Release 2018-227, Nov. 19, 2018).

The proposed rules appropriately treat licenses, permits, and other rights that derive their value from real property as eligible assets.  The regulations also provide a helpful safe harbor for incidental personal property (up to 15% of the aggregate value of the replacement property) that is typically transferred, in standard commercial transactions, with the real property.  (Federal Register, June 12, Statutory Limitations on Like-Kind Exchanges)

Like-Kind Exchange Deadlines

Like-kind exchanges must meet strict deadlines to qualify for deferral.  The pandemic has greatly complicated the ability to complete an exchange.  The reasons include: stay-at-home orders, flight restrictions, an inability to visit sites or perform appraisals, the closure of local governmental offices, and a general inability to conduct the necessary due diligence. 

  • In March, The Roundtable and other real estate organizations requested an extension of 1031 deadlines.  (Coalition LKE letter, March 23)
  • The Treasury Department in early April extended the 45-day deadline for identifying like-kind exchange replacement property and the 180-day deadline to close on a like-kind exchange transaction until July 15, 2020.  (IRS Notice 2020-23)
  • “It seemed like a good-government, reasonable thing to do,” The Roundtable’s Ryan McCormick recently told The New York Times.  Real estate investors could not travel because of pandemic lockdowns and completing due diligence steps such as an appraisal became difficult, if not impossible. “Taxpayers were seeking some additional time to work through that,” McCormick told the Times.  (The New York Times, June 5)
  • An industry coalition, including The Real Estate Roundtable, on April 20 wrote to the Treasury Secretary seeking further clarification and relief on 1031 deadlines.  (Coalition letter, April 20, 2020)

The Roundtable’s TPAC will review the June 11 proposed regulations and comment on any further like-kind exchange issues that may need clarification. 

TPAC Video Discussions

TPAC held its first remote meeting in conjunction with The Roundtable’s Annual Meeting on June 12.  Wide-ranging TPAC discussions touch on recent social unrest; the COVID-19 pandemic and the CARES Act; partnership audit reform;  section 199A;  like-kind exchanges, COD income; energy-efficiency incentives; REIT related party rules; section 163(j); and much more. TPAC recordings on The Roundtable’s YouTube channel include:

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Paycheck Protection Program Changes Signed Into Law; Next COVID-19 Stimulus Legislation Expected by July

Posted on by Trey Jackson

Architect of the Capitol

Legislative changes to the Paycheck Protection Program (PPP) signed into law today will ease restrictions on forgivable loans to small businesses seeking to retain and pay workers affected by COVID-19.  (BGov, June 4)

  • H.R. 7010 passed the House (417-1) on May 28, cleared the Senate by unanimous consent on June 3 and was signed into law by President Trump today.  (Roundtable Weekly, May 22 and AP, June 5)

The bill also:   

  • Replaces the “75-25 Rule” on the use of PPP loan proceeds for loan forgiveness purposes with requirements to spend at least 60% for payroll costs and up to 40% for covered mortgage interest, rent, and utility payments;

  • Extends the PPP re-payment period to five years for small businesses that do not receive loan forgiveness;
  • Allows PPP loan recipients to take full advantage of deferral of employment taxes through the end of 2020; and
     
  • Provides borrowers a “safe harbor” from the loan forgiveness rehiring requirement if the borrower is unable to rehire an individual who was an employee of the recipient on or before February 15, 2020, or if the borrower can demonstrate an inability to hire similarly qualified employees on or before December 31, 2020;  (Congressional Research Service summary, May 28)

Senate Majority Leader Mitch McConnell (R-KY) said additional  technical fixes to the PPP will follow at the requests of Sen. Ron Johnson (R-WI), Senate Small Business and Entrepreneurship Chairman Marco Rubio (R-FL) and Sen. Susan Collins (R-ME) (RollCall, June 3)

Next COVID-19 Stimulus; Fed Expands Muni Loan Program

The Trump Administration is considering policy options for the next legislative response to the coronavirus pandemic.  The Wall Street Journal reports a senior administration official stated this week, “We’ve been through the rescue phase and we’re now in the transitional reopening phase and I think generally speaking we’d like to move into a growth-incentive phase for the future economy.”  (WSJ, June 2)

  • White House aides, according the Journal, stated the nation’s mass unrest over police brutality and racial inequality, along with the progress of business reopening efforts, will influence the pace of discussions – but they do not expect the completion of a package until July.
  • House Ways and Means Committee Chair Richard E. Neal (D-MA) on Wednesday said he is continuing negotiations with Treasury Secretary Steven Mnuchin on another round of coronavirus relief legislation that could include major infrastructure spending and tax credit proposals.  (Law360, June 4)
  • Neal said on June 3 that in addition to infrastructure investment, he intends to propose an expansion of new markets tax credits for private investment in low-income communities, low-income housing tax credits to build affordable housing, and historic rehabilitation tax credits for preservation purposes. (TNT, June 4)
  • This week also saw the Federal Reserve expand the scope of its $500 billion a lending program for state and local governments to include smaller borrowers.   (Fed news release, June 3)
  • The Fed’s expansion of its Municipal Liquidity Facility (MLF) will now enable all U.S. states “… to have at least two cities or counties eligible to directly issue notes to the MLF regardless of population.”  Governors from each state will also be able to select two bond issuers “…whose revenues are generally derived from operating government activities (such as public transit, airports, toll facilities, and utilities) to be eligible to directly use the facility.’  (MLF term sheet, June 3)
  • The MLF expansion may now allow sparsely populates states to designate two areas hard hit by the economic repercussions of the pandemic, or bond issuers like New York’s subway system, to sell debt to the Fed as a way to maintain critical services.  (New York Times, June 3)

The various policy response to economic impacts of COVID-19 will be a focus next week during The Roundtable’s Virtual Annual Meeting, which will include a discussion with Treasury Secretary Steven Mnuchin.

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

Posted on by Trey Jackson

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

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

Like-Kind Exchange Deadline Clarification

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

  • The letter requests that Treasury or the IRS clarify that recently issued IRS Notice 2020-23 did indeed initiate the 120-day extension of like-kind exchange deadlines that is part of the 2018 revenue procedure that applies to declared disasters.
  • At a minimum, Notice 2020-23 extended the 45-day deadline for identifying like-kind exchange replacement property and the 180-day deadline to close on a like-kind exchange transaction until July 15, 2020 (if the deadline otherwise would have occurred between April 1 and July 14).
  • However, relief associated with prior disasters provided 120-day deadline extensions that were retroactive to the date of the disaster declaration.  The IRS may have intended to grant the full 120-day extension, and some experts interpret the guidance as providing the longer benefit, retroactive to March 13, the date of the President’s COVID-19 disaster declaration.
  • As the letter notes, governmental restrictions and Stay at Home orders in place across the country, along with the fear of catching or spreading the life-threatening disease, threaten the ability of taxpayers to complete like-kind exchanges.
  • Identifying properties for trade purposes requires travel and a confidence in both the expected cash-flow stream and the value of potentially acquired property. Closing on an identified property requires these same conditions plus extensive due diligence by the buyer, lender and other third-party contractors, such as appraisers.  All of these necessary steps are thwarted by travel restrictions, the inability to access properties, and the closures of title/escrow companies and governmental recording offices.
  • The letter concludes, “This relief would give taxpayers who may have commenced, or who wish to commence an exchange, the necessary time to identify and / or close on a replacement property.  Taxpayers, many of whom are small to mid-sized businesses and middle class investors, should not have to be concerned about the possibility of having to pay significant capital gains taxes because like-kind exchange transactions cannot be completed due to the disruption caused by the coronavirus pandemic.”

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

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

Posted on by Trey Jackson

IRS Building

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

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

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

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

Posted on by Trey Jackson

IRS Building

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

Partnership Amended Returns

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

Business Interest Limitation

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

Like-Kind Exchanges

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

Opportunity Zones

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

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

Posted on by Trey Jackson

treasury-department-building_x475w

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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