Tag: Tax Policy

Real Estate, Environmental Groups Recommend Accelerated Depreciation for Energy Efficient Building Equipment

Posted on by Trey Jackson

A broad coalition of real estate and environmental organizations urged congressional tax writers this week to establish an accelerated depreciation schedule for a new category of Energy Efficient Qualified Improvement Property installed in buildings – or “E-QUIP.”  (Coalition E-QUIP Letter, May 8)

  

A broad coalition of real estate and environmental organizations urged congressional tax writers this week to establish an accelerated depreciation schedule for a new category of Energy Efficient Qualified Improvement Property installed in buildings – or “E-QUIP.” (Coalition E-QUIP Letter, May 8)

  • The coalition, led by The Real Estate Roundtable, recommends “a uniform E-QUIP 10-year recovery period [to] promote productive business investment by spurring high performance upgrades in commercial and multifamily buildings. In turn, optimizing energy efficient building performance will help create well-paying jobs in the construction, design, and energy sectors; boost equipment manufacturing; enhance our country’s energy independence; and reduce the built environment’s carbon footprint.”    
  • Legislation supported by The Roundtable is currently pending to fix a technical error from the Tax Cut and Jobs Act regarding depreciation of interior building improvements, known as Qualified Improvement Property (“QIP”).  (Roundtable Weekly,  March 15 and QIP Policy Comment Letter, April 26)  However, even if Congress fixes the QIP mistake, it would not meaningfully encourage commercial and multifamily owners to invest in expensive high-performance building equipment.    
  • The new E-QUIP coalition thus proposes a beneficial 10-year cost recovery period for efficient HVAC, lights, roofs and other components that will save energy and reduce carbon emissions attributable to buildings, their tenants, and other occupants.  
  • Roundtable President and CEO Jeffrey DeBoer said, “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.  As Congress considers potential tax, infrastructure, and climate legislation, the E-QUIP proposal should have bipartisan appeal on a range of important policies prioritized by Republicans and Democrats.”
  • An elective 10-year, straight-line cost recovery period for E-QUIP expenditures for taxable income, as well as for earnings and profits purposes, is the core of the proposal.  Other elements recommended to Congressional tax writers for consideration in E-QUIP legislation are set forth in the real estate and environmental groups’ coalition letter.   

E-QUIP will be one of many policies affecting commercial real estate discussed during the June 11-12 Annual Roundtable Meeting in Washington DC.

Business Coalition Urges Congress to Correct Cost Recovery Period for Nonresidential Real Estate Improvements

Posted on by Trey Jackson

A coalition of businesses and trade groups, including The Real Estate Roundtable, today urged all members of Congress to cosponsor the Restoring Investment in Improvements Act (H.R. 1869 /  S. 803) – a bill that would correct a drafting error in tax reform.  The legislation would give qualified improvement property (QIP) a 15-year depreciation period and restore its eligibility for accelerated bonus depreciation. (QIP Policy Comment Letter, April 26)

 

A coalition of businesses and trade groups, including The Real Estate Roundtable, urged all members of Congress to cosponsor the Restoring Investment in Improvements Act (H.R. 1869 /  S. 803) – a bill that would correct a drafting error in tax reform.  The legislation would give qualified improvement property (QIP) a 15-year depreciation period and restore its eligibility for accelerated bonus depreciation. (QIP Policy Comment Letter, April 26)

  • House Ways and Means Committee members Jimmy Panetta (D-CA) and Jackie Walorski (R-IN) introduced H.R. 1869 on March 26. The Senate bill (S. 803) was introduced earlier in the month by Sens. Pat Toomey (R-PA) and Doug Jones (D-AL).  (Roundtable Weekly, March 15)
  • The legislation would correct a mistake in the Tax Cuts and Jobs Act of 2017 that lengthened the cost recovery period for QIP, which generally applies to improvements to the interior of existing nonresidential buildings.  
  • The error has resulted in a significantly longer 39- or 40-year cost recovery period.  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.
  • The April 26 coalition letter to leadership in the House and Senate, as well as leaders of tax committees in both chambers, notes that there is no budget impact to restore the QIP depreciation to 15 years.  
  • Specific examples are offered in the letter to show the negative consequences that the current law is having on QIP investments and commercial renovation projects.  The letter states, “Not surprisingly, it is causing numerous negative ripple effects for individuals and businesses, including on job creation, sales of QIP products and building supplies, property values, building occupancy and rental income, cost-saving energy efficiency gains, and even on fire safety.”
  • Roundtable President and CEO Jeffrey D. DeBoer said, “The Restoring Investment in Improvements Act would enact an immediate and necessary correction to the Tax Cuts and Jobs Act.  It would reverse an unnecessary drag on building investment, construction activity, and job creation.  Congress should move on this common-sense legislation quickly and reinstate a much shorter cost recovery period for building improvements.” 

In the weeks ahead, the House Ways and Means and Senate Finance Committees may address “technical corrections” to the TCJA, such as the cost recovery period for QIP along with other tax legislative priorities. (Roundtable Weekly, March 29)

Bipartisan FIRPTA Repeal Legislation Introduced

Posted on by Trey Jackson

Bipartisan legislation introduced on April 10 by Reps. John Larson (D-CT) and Kenny Marchant (R-TX) would repeal the Foreign Investment in Real Property Tax Act (FIRPTA) – a discriminatory capital gains tax on foreign investors in U.S. real estate.  (Legislative text of the Invest in America Act and one-page summary)

This week, Rep. John Larson (D-CT), above, and Rep. Kenny Marchant (R-TX)  introduced bipartisan legislation, Invest in America Act, that would repeal FIRPTA.

  • FIRPTA’s tax penalty does not apply to any other asset class except U.S. real estate.  The arcane tax, enacted in 1980, discourages capital formation and investment that could create jobs and improve U.S. real estate and infrastructure.  By repealing FIRPTA, the Invest in America Act (H.R. 2210) would unlock foreign capital for productive investment. 
  • Rep. Larson stated, “The American Society of Civil Engineers has given America’s infrastructure a D+ rating. That’s unacceptable. This isn’t a Republican or Democrat issue, this is an American issue. I am proud to introduce the Invest in America Act today with Congressman Marchant to unlock more opportunities to invest in communities in Connecticut and across the nation and to rebuild our infrastructure.”  (Larson-Marchant news release, April 10)
  • Rep. Marchant added, “I am proud to partner with Congressman Larson to introduce the Invest in America Act, which will remove the barriers in our tax code that discourage investments in real estate.  By providing parity to real estate assets under the law, foreign investors will be able to create more opportunities and more prosperity for American families.”
  • The Larson-Marchant bill (H.R. 2210) was introduced with a total of 11 original cosponsors from the tax-writing Ways and Means Committee who represent every major region of the country.  
  • In 2015, Congress passed meaningful reforms to FIRPTA, exempting foreign pension funds and doubling the amount a foreign interest may invest in a publicly traded U.S. REIT.  (Roundtable Weekly, March 18, 2016)

    A  report by the Rosen Consulting Group  (RCG) estimated that FIRPTA repeal would generate an initial increase of between $65 billion and $125 billion in international investment in U.S. commercial real estate.  

     

  • The Real Estate Roundtable and American Institute of Architects released a statement of support for the Invest in America Act yesterday.  RER President and CEO Jeffrey DeBoer said, “The FIRPTA regime is an anti-competitive outlier that deflects global capital to other countries.  Our infrastructure challenges demand a holistic approach and innovative solutions. Now is the time to build on the recent success of the 2015 reforms by eliminating FIRPTA outright and unlocking private capital for even more job growth and infrastructure improvements.”
  • The Roundtable and 19 national trade organizations wrote to Ways and Means Committee Members and other key House lawmakers on March 28, urging them to support the Invest in America Act.  (Coalition FIRPTA letter, March 28)

A report by the Rosen Consulting Group (RCG) estimated that FIRPTA repeal would generate an initial increase of between $65 billion and $125 billion in international investment in U.S. commercial real estate. This new level of activity would lead to the creation of 147,000 to 284,000 jobs throughout the economy and increase taxpayers’ income by $8 billion to $16 billion.  (Unlocking Foreign Investment in U.S. Commercial Real Estate, July 2017) 

 

Senators Introduce Bipartisan Legislation to Correct Cost Recovery Period for Nonresidential Real Estate Improvements

Posted on by Trey Jackson

This week U.S. Senators Pat Toomey (R-PA) and Doug Jones (D-AL) introduced bipartisan legislation, the Restoring Investment in Improvements Act (S. 803), to correct a mistake in the Tax Cuts and Jobs Act that lengthened the cost recovery period for qualified improvement property (QIP).  

U.S. Senators Pat Toomey (R-PA) and Doug Jones (D-AL) introduced bipartisan legislation, the Restoring Investment in Improvements Act (  S. 803  ), to correct a mistake in the Tax Cuts and Jobs Act that lengthened the cost recovery period for qualified improvement property (QIP).  

  • The unintended drafting error has resulted in a significantly longer 39- or 40-year cost recovery period for most improvements to the interior of nonresidential real estate.  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.
  • Prior to the law’s enactment, commercial building tenants, retail store owners and restaurant owners could write off the costs of their renovations over a span of 15 years.  The legislation drafted by Sens. Toomey and Jones would allow many businesses to immediately deduct the full cost of interior renovations, and would apply retroactively to January 1, 2018. (The Hill, Mar. 14)
  • The Tax Cuts and Jobs Act included a strict new limitation on the deductibility of business interest expense, but also provided an exception for an “electing real property trade or business.”  In general, taxpayers that develop, rent, manage, or operate real estate are not subject to the interest limits, but are subject to longer cost recovery periods for their real estate and real estate improvements.  The Toomey-Jones bill would ensure that the QIP of an electing real property trade or business is depreciated over 20 years, rather than 40 years.   

  • Roundtable President and CEO Jeffrey D. DeBoer applauded the Senators bipartisan legislation introduced this week. “The Restoring Investment in Improvements Act ( S. 803 ) introduced by Senators Toomey and Jones is a simple and straightforward technical correction to the Tax Cuts and Jobs Act,” he said.

    “The Restoring Investment in Improvements Act (S. 803) introduced by Senators Toomey and Jones is a simple and straightforward technical correction to the Tax Cuts and Jobs Act.  An acknowledged drafting error significantly lengthened the depreciation period for building improvements.  This has caused a large increase in the after-tax costs of modernizing and altering buildings of all types and uses, from shopping centers to office buildings to industrial properties and restaurants.  The result is an immediate and unnecessary drag on building investment, construction activity, and job creation, said Roundtable President and CEO Jeffrey D. DeBoer.  “Congress should act quickly to pass this legislation and reinstate a much shorter cost recovery period for building improvements.”

  • In October 2018, the Roundtable along with 239 businesses and trade groups, wrote to Secretary Mnuchin urging the Treasury Department to provide taxpayers with administrative relief from the drafting error. (Roundtable Weekly, Oct. 12, 2018) 

On Thursday, Treasury Secretary Steven Mnuchin told reporters that he has discussed fixing technical errors in the 2017 tax law with congressional leaders on both sides. “This is something we’re very interested in doing. There’s a lot of demand,” he said following his testimony before the Senate Finance Committee. (Bloomberg, Mar. 14)

Roundtable Asks Treasury to Clarify Real Estate Exception to New Limit on Business Interest Deductibility

Posted on by Trey Jackson

The Real Estate Roundtable on Tuesday wrote to the Treasury Department and IRS about the new limitation on business interest deductibility enacted in the Tax Cuts and Jobs Act of 2017 (TCJA).  The provision allows qualifying businesses to continue fully deducting interest related to commercial real estate debt.  (Roundtable comment letter, Feb. 26)

The Roundtable’s Feb. 26 letter on business interest deductibility.

  • Roundtable President & CEO Jeffrey DeBoer sent the  detailed comments as Treasury officials work to finalize proposed regulations implementing TCJA’s new section 163(j), which limits the deductibility of business interest to no more than 30% of modified, adjusted taxable income.  Section 163(j) includes a critical exception for real estate.
  • On December 28, 2018 Treasury published proposed regulations clarifying that partner-level debt may qualify for the real estate exception-if the debt is allocable to a partnership engaged in a real property trade or business (RPTOB). 
  • DeBoer notes in The Roundtable’s Feb. 26 letter, “In light of the clear legislative intent to enact a broad real estate exception and its importance to the health and stability of real estate markets, the final Treasury regulations should build on the proposed rules and not limit unnecessarily the ability of a real property trade or business (RPTOB) to elect out of the provisions of section 163(j).”
  • DeBoer adds, “No issue in tax reform is more important to the health and stability of U.S. commercial real estate than the new rules related to the taxation of business-related borrowing.  U.S. commercial real estate is leveraged conservatively with roughly $14 trillion of total property value and $4 trillion of debt.”

The letter includes detailed comments on several 163(j) implementation issues and makes the following recommendations:

The need to preserve the deduction for income-producing real estate was at the center of Jeffrey DeBoer’s testimony and exchanges with Senate Finance Committee members before final passage of the 2017 tax overhaul law. (Roundtable Statement for the Record, Sept. 19, 2017 and video clips). 

 

  • The real estate exception should extend through all “tiered” investment structures. 
  • The real estate exception should apply fully to non-rental activities. 
  • Treasury regulations should not “whipsaw” corporations/REITs through conflicting definitions of a “trade or business” that can effectively block their ability to use the real estate exception. 
  • Treasury regulations should modify the anti-abuse rule for related-party leases. 
  • The small business exception should not prevent otherwise eligible partners from qualifying for the real estate exception. 
  • Debt allocation rules should not undercount real estate assets for purposes of the real estate exception.
  • Treasury regulations should confirm that senior housing constitutes a real property trade or business.

The economic consequences of changes to the deductibility of business interest expense, and particularly the potential impact on real estate, was a central focus of lawmakers during consideration of the historic tax overhaul in 2017.  The need to preserve the deduction for income-producing real estate was at the center of DeBoer’s testimony and exchanges with Senate Finance Committee Chairman Orrin Hatch – and other members of the committee – during the last congressional hearing on business tax reform prior to votes on the TCJA.  (Roundtable Statement for the Record, Sept. 19, 2017 and video clips).  

Congressional Lame Duck Session Could Consider Condominium Tax Accounting and Other Real Estate Tax Policy Issues

Posted on by Trey Jackson

Following the Nov. 6 mid-term elections, a “Lame Duck” session of Congress is expected to consider various tax policies of importance to commercial real estate.   

Several tax issues of importance to real estate may be in play during the November “Lame Duck” congressional session, including  condo tax accounting rules; technical corrections; the cost recovery period for qualified improvement property (QIP);and tax extenders.

  • As part of a potential year-end omnibus spending bill to fund the government, tax policies that may be addressed include condo tax accounting rules; technical corrections; the cost recovery period for qualified improvement property (QIP); and tax extenders.  (Roundtable Weekly, Oct. 12) 
  • Current condo tax accounting rules require multifamily developers of buildings with five or more residential units to recognize income and pay tax on their expected profit as construction is ongoing — well before pre-sale transactions are closed and full payment is due from the buyer.  This mismatch of cash flow and tax liability prevents income tax deferment until a condo building is finished.   Home builders of single-family homes, townhouses and row houses are not subject to this accounting rule restriction. 
  • A House bill introduced last summer by Reps. Carlos Curbelo (R-FL) and Joe Crowley (D-NY) aimed to correct this disparity.  Although the Fair Accounting for Condominium Construction Act (H.R. 3659) stalled in 2017, it could serve as a template for inclusion in year-end tax legislation.  The Real Estate Roundtable supports lawmakers’ efforts to pass H.R. 3659. 
  • Other congressional efforts to ensure that development accounting rules treat condos like other residential construction included a 2016 letter from 10 members of the Senate Finance Committee urging regulatory corrections to former Treasury Secretary Jack Lew. 
  • Roundtable President and CEO Jeffrey DeBoer on April 7, 2017 sent a letter to Treasury Secretary Steven Mnuchin   outlining eight regulatory actions the Treasury Department could take to stimulate new real estate investment, job creation, and economic growth.  Among the recommendations addressed in the letter are tax accounting for new condominium construction; the Foreign Investment in Real Property Tax Act, tax treatment of private real estate funds and partnership tax rules. 

Last week, an article on the condo tax accounting issue in The Real Deal included a quote from Roundtable Senior Vice President & Counsel Ryan McCormick, who commented on the outlook for correcting the current rules.  “Legislation may be the most likely route, in light of all the work ongoing at Treasury with tax reform,” McCormick said.

FIRPTA Repeal Bill Introduced; “Tax Reform 2.0” Mark-Up Next Week

Posted on by Trey Jackson

As House Republican leaders this week promoted a second round of tax cuts before the mid-term elections, Reps. Kenny Marchant (R-TX) and Joe Crowley (D-NY) introduced legislation yesterday to repeal the Foreign Investment in Real Property Tax Act of 1980 (FIRPTA). 

A recent report by the Rosen Consulting Group (RCG) estimated that FIRPTA repeal would generate an initial increase of between $65 billion and $125 billion in international investment in U.S. commercial real estate. 

  • FIRPTA subjects foreign investment in U.S. real property to a much higher tax burden than foreign investment in any other class of assets. As a result, overseas investors are often discouraged from investing in U.S. real estate.  FIRPTA effectively deters billions of dollars of capital that would strengthen U.S. infrastructure, expand the tax base and create much-needed domestic jobs.
  • The Marchant-Crowley Invest in America Act would build on FIRPTA reforms Congress passed in the Protecting Americans from Tax Hikes Act of 2015 (the PATH Act) by repealing FIRPTA altogether.  
  • The PATH Act exempted foreign pension funds from FIRPTA and increased the share of a publicly traded US REIT that a foreign investor can hold without triggering FIRPTA.  The PATH Act changes injected billions of dollars in foreign investment into the U.S. real estate market, and contributed to a spike in capital investment in many parts of the country.  (Roundtable Weekly – Oct 13, 2017)
  • A recent report by the Rosen Consulting Group (RCG) estimated that FIRPTA repeal would generate an initial increase of between $65 billion and $125 billion in international investment in U.S. commercial real estate. The report determined that repealing FIRPTA would generate between $26 and $49 billion in total economic activity — a boost of 10 to 30 basis points to U.S. GDP.  This new level of activity would lead to the creation of 147,000 to 284,000 jobs throughout the economy and increase taxpayers’ income by $8 billion to $16 billion.  RCG’s report concluded that repealing FIRPTA would not have a meaningful impact on the federal budget, as FIRPTA accounted for less than 0.002% of federal tax receipts from 2009 to 2013. (Unlocking Foreign Investment in U.S. Commercial Real Estate, July 2017)
  • FIRPTA reform is a long-standing goal of The Roundtable.  The economic benefits of a comprehensive FIRPTA repeal was a focus of testimony by Real Estate Roundtable President and CEO Jeffrey DeBoer before the U.S. Senate Finance Committee on Sept. 19, 2017.  (Roundtable Weekly) 

“In 2015, Congress passed the most significant reforms of FIRPTA since its passage in 1980.  Congress should build on the recent success by repealing FIRPTA outright as part of tax reform. Unleashed by FIRPTA’s repeal, capital from abroad would create jobs by financing new real estate developments, as well as the upgrading and rehabilitation of existing buildings. Architects, engineers, construction firms, subcontractors, and others would be put to work building and improving commercial buildings and infrastructure,” DeBoer testified.  (Roundtable Statement for the Record, Senate Finance Committee Sept 2017) 

Tax Reform 2.0

GOP leaders aiming to pass another round of tax reforms through the House before the November mid-term elections are planning next week to introduce “Tax Reform 2.0” legislation. The bill would make the individual tax cuts contained in President Donald Trump’s December tax overhaul permanent, while expanding taxpayer savings opportunities. 

House Ways and Means Committee Chairman Kevin Brady (R-TX) commented, “… next week we will introduce legislation to make permanent the small business and individual tax cuts that are driving these positive economic numbers. This investment into our workers will produce over a million and a half new jobs, continue to boost wages, and increase America’s competitiveness for years to come.”  (Accounting Today, Sept. 7). 
  • Today, House Ways and Means Committee Chairman Kevin Brady (R-TX) commented on the 2.0 legislation expected to be marked up by his committee next week while reacting to the U.S. Bureau of Labor Statistics’ August jobs report showing a gain of 201,000 jobs.
  • “August was another solid month of job growth, marking over 1.6 million jobs created this year and the highest level of wage gains since 2009. And we know we can do even better to continue creating greater financial security for our workers and Main Street businesses. That’s why next week we will introduce legislation to make permanent the small business and individual tax cuts that are driving these positive economic numbers. This investment into our workers will produce over a million and a half new jobs, continue to boost wages, and increase America’s competitiveness for years to come,” Brady said.  (Accounting Today, Sept. 7)
  • In July, Brady released a two-page framework for “Tax Reform 2.0” that would make individual and small business tax cuts.  Although last December’s Tax Cuts and Jobs Act made corporate tax cuts permanent, most provisions for individuals and pass-through businesses are set to expire at the end of 2025.  Yesterday, Ways and Means Committee Republicans released an updated outline of the Tax Cuts 2.0 package.
  • Bloomberg reported this week that House Majority Whip Steve Scalise stated, “We’re not resting on our laurels. We’re seeing this great economic growth, and so we’re starting to put together tax cuts 2.0.”  (Los Angeles Times, Sept. 5)

The central feature of the reform proposal — a permanent extension of tax cuts for individuals — is unlikely to pass the Senate, where it would need Democratic support (The Hill, July 24).  Additionally,  the introduction of a Tax Reform 2.0 bill may delay legislation addressing tax technical corrections until after the November elections. (Roundtable Weekly, July 20)

 

Ways & Means Launches Hearings on Impact of Tax Reforms; Top Treasury Official Outlines Timeline for Implementation Guidance

Posted on by Trey Jackson

The House Ways and Means Committee this week held the first in a series of hearings on how the Tax Cuts and Jobs Act (TCJA) is affecting job creation and the economy five months after its enactment.

House Ways and Means Chairman Kevin Brady (R-TX) in his  opening statement offered a list of favorable economic statistics and projections that he said are attributable to the new law

Treasury Assistant Secretary Sketches Timetable for Regulations Implementing Tax Reform 
Certain provisions of the TCJA of interest to commercial real estate could be addressed in upcoming IRS guidance or in a congressional technical corrections bill.

  • Acting IRS Commissioner David Kautter on May 12 said that Treasury and the IRS hope to complete proposed regulations on section 199A passthrough deduction by mid- to late-July. (Tax Notes, May 15, “Kautter Talks Timelines for TCJA Guidance Projects” and Roundtable Weekly, May 4).
  • Kautter added that the target date for a notice of proposed rulemaking on section 163(j) business interest deduction limitation is late summer or early fall. (Roundtable Weekly, April 6).)
  • Natalie Tucker, legislation tax accountant at the Joint Committee on Taxation, recently  said that the cost-recovery period for qualified improvement property rises to the level of consideration for a “technical correction.”  While Congress was formulating the TCJA, a new category—qualified improvement property—wasn’t assigned a cost-recovery period, and fell to the 39-year period by default, rather than the intended 15-year period.  That was not the intent of Congress and therefore qualifies for inclusion in a technical corrections bill, according to Tucker.  (Bloomberg Law, May 11, “Agreement Reached on Three ‘True’ Technical Corrections”)

Along with TCJA rulemaking and implementation, the legislation’s impact on CRE will be a focus of discussion at The Roundtable’s Annual Business Meeting and Policy Advisory Committee Meetings on June 14-15 in Washington, DC.