Tag: Tax Policy

Tax Proposals Under Scrutiny as Timetable Moves Up for Mammoth Reconciliation Bill

Posted on by Trey Jackson

The unanticipated commitment by Speaker Pelosi to allow a stand-alone vote on the bipartisan Senate infrastructure bill no later than September 27 has scrambled the Congressional calendar and put increased attention and focus on the potential for major tax changes.

Why It Matters

  • House Leaders are urging committees, including the powerful Ways and Means Committee, to complete their work on the $3.5 trillion budget reconciliation bill by September 15.  Ways and Means Chairman Richie Neal has indicated a formal mark-up could start the week of Sept. 6 and continue 4-5 days.  (E&E Daily, Aug. 25)
  • Accelerating the consideration of the $3.5 trillion reconciliation bill may allow its supporters and advocates to retain political momentum for the massive package of social safety net, environmental, tax, and other policies—momentum that could be lost once the infrastructure bill is sent to the President.
  • The shortened timetable, however, puts pressure on lawmakers who are considering complex changes to the tax code that would normally require hearings, extended debate, and substantial vetting.  

Industry Concerns

  • The Real Estate Roundtable has raised concerns regarding a number of proposals in the President’s plan that would raise the tax burden on capital formation, undermine property values and the functioning of real estate markets, and harm the industry’s ability to create jobs and support local communities through property tax revenue.  These proposals include restrictions on like-kind exchanges, an elimination of the reduced tax rate on capital gains, and the taxation of unrealized gains at death.
  • On Tuesday, the accounting industry expressed strong concerns with the President’s proposed changes to capital income. The letter noted that, “[t]he taxation of the capital gains on gift or death in many cases would be the third time that the gain is taxed.”  Imposing immediate tax on transfers by gift or death is an unreasonable requirement when the transfers are non-liquid assets such as real estate, business interests, etc., because it may require the forced liquidation of some or all of the assets transferred,” they continued.    
  • Last Friday, the Tax Foundation challenged the Administration’s claim that their tax proposals would spare 97 percent of small businesses.  The organization analyzed the most recent IRS data and concluded the President’s proposals would reach more than half of pass-through business income (because 54% of pass-through income is earned by taxpayers making more than $500,000).
  • At the same time, lawmakers are mobilizing to ensure that the $3.5 trillion bill includes priorities such as increased investment in affordable housing.  On Thursday, 111 House Democrats led by Reps. Suzan DelBene (D-WA) and Don Beyer (D-VA) wrote to Speaker Pelosi urging that the legislation include a significant expansion of the low-income housing tax credit.

Contact Congress

Senate Democrats Pass Budget Resolution that Would Authorize $3.5 trillion “Human Infrastructure” Bill with Large Tax Increases

Posted on by Trey Jackson

DC monuments night

Senate Democrats voted August 11 to advance a $3.5 trillion “human infrastructure” budget resolution, which allows development of legislation that could pass later this year without any Republican support. The budget blueprint passed on a party-line vote of 50-49 the day after the Senate passed a $1.2 trillion “physical infrastructure” bill on a bipartisan basis. (BGov, Aug 11 and Roundtable Weekly, story above) 

Why It Matters 

  • The Senate budget resolution supports President Biden’s wide-ranging domestic priorities that aim to expand the federal social safety net and combat climate change. (New York Times and The Hill, Aug. 11)
  • The sprawling human infrastructure proposal would be partially financed by raising taxes on corporations and wealthy individuals – and potentially include a variety of tax increases affecting commercial real estate.
  • The Senate measure also provided instructions for various committees to craft bills under “reconciliation” budget rules. If approved by the Senate Parliamentarian, the committees’ work would be combined into final legislation that could pass on a majority vote, thereby bypassing a Republican filibuster. (Senate Democratic Memorandum, Aug. 9)
  • The House announced this week that it will return early from summer recess on Aug. 23 to consider the budget resolution. (Associated Press and CQ, Aug. 11)
  • House Speaker Nancy Pelosi (D-CA) reiterated on Aug. 11 that until the Senate finishes and passes the massive reconciliation bill, the House will not vote on the physical infrastructure legislation. Other Members of the Democratic Caucus, including Rep. Josh Gottheimer (D-NJ), co-chair of the bipartisan Problem Solvers Caucus, have called on Congressional Leaders to decouple the measures and send the bipartisan infrastructure bill to the President without delay. (Politico, Aug. 11 and The Hill, Aug. 11) 

Taxes & CRE  

Philadelphia, PA skyline

Roundtable President and CEO Jeffrey DeBoer commented on the Senate’s $3.5 trillion reconciliation bill and the tax proposals under consideration.  

  • DeBoer on Aug 11 stated, “This [reconciliation] package may be financed with a variety of tax increases affecting step-up in basis, like-kind exchanges, carried interest and capital gains that would act as a cumulative drag on investment at the exact time when sectors of the economy need incentives to recover from the pandemic. The Roundtable urges Senate and House policymakers to be very cautious as they proceed on the reconciliation bill – so that one-step forward with the physical infrastructure bill is not met with two-steps backward from tax increases.” (Roundtable statement, Aug. 11)
  • The Roundtable this week produced a summary of budget reconciliation tax issues that could directly impact commercial real estate, including: 
    • Like-Kind Exchanges
    • Capital Gains
    • Pass-through Business Income
    • Step-up in Basis and Taxation of Gains at Death
    • Carried Interest
    • Energy Efficiency Incentives
    • Affordable Housing Incentives 

Roundtable Infrastructure Town Hall 

Roundtable Infrastructure Town Hall - image capture

  • The Roundtable held an all-member Infrastructure Town Hall on Aug. 12 to discuss the Senate reconciliation measure and what it means for commercial real estate. Rep. Tom Suozzi (D-NY), a member of the tax-writing House Ways and Means Committee, center in photo,  joined Roundtable Chair John Fish, top right, Jeffrey DeBoer, top left, and other Roundtable staff for the Town Hall discussion.

The congressional debate on infrastructure is expected to extend into the fall, when policymakers face multiple other deadlines that converge on Sept. 30 – government funding for FY2022, reauthorization of funding for surface transportation programs, and reauthorization of the National Flood Insurance Program. The Roundtable is scheduled to discuss all these issues at its Fall Meeting on Oct. 5 in Washington, DC (Roundtable-level members only). 

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House Republicans Urge Biden Administration to Preserve Like-Kind Exchanges

Posted on by Trey Jackson

A group of 88 House Republicans, led by Rep. Randy Feenstra (R-IA), above, sent a letter to President Joe Biden on Aug. 3 urging him “not to damage the livelihood of farmers everywhere by repealing or changing like-kind exchanges.” ( Coalition letter and Feenstra news release)

Agriculture Sector Impact 

  • Like-kind exchanges (LKEs) allow real estate, farming, and other businesses to defer capital gain when exchanging real property used in a trade or business for property of a like kind. Like-kind exchanges also help businesses to grow organically, with less debt, by reinvesting gains on a tax-deferred basis in new and productive assets.
  • President Biden has proposed restricting the use of LKEs by limiting deferred gain in any one year to no more than $500,000 for single taxpayers and $1 million for married taxpayers. (Treasury Department’s Summary of Revenue Proposals, “Green Book” budget documents, and Roundtable Weekly, April 30)
  • The coalition of House policymakers emphasized in their Aug. 3 letter how LKEs allow farmers and other small business owners to improve their operations and invest in better income-producing properties. The letter noted that four out of five individuals who utilize these tax deferments are qualified as small investors by the IRS.
  • The letter stated, “For the agricultural community, a cap on like-kind exchanges would limit farmers’ ability to improve their operations through combining acreage, purchasing more productive land, and mitigating environmental impacts. Further, capping like­kind exchanges could make it more difficult to restructure businesses so that young or beginning farmers can join operations. Retiring farmers could be prevented from using like-kind exchanges to exchange their farm or ranch for other real estate, allowing for the next generation to take over, without depleting their life savings.”
  • The 88 policymakers also commented how the negative impact of the administration’s LKE proposal would radiate outward from individual farm owners and agricultural investors into the larger agricultural sector and the national economy at large. 

Roundtable’s Strong Support for LKEs 

  • On May 27, a broad business coalition that included The Real Estate Roundtable held a virtual briefing for members of Congress and their staff on the longstanding economic importance of LKEs – and detailed the potential negative unintended consequences of limiting section 1031. (Roundtable Weekly, May 28)
  • The briefing, moderated by Roundtable President and CEO Jeffrey DeBoer, included expert speakers and featured recent research into the macro-economic impact of LKEs. (See “The Tax and Economic Impacts of Section 1031 Like-Kind Exchanges in Real Estate” by Professor Milena Petrova and Dr. David Ling)
  • On May 18, The Roundtable and others submitted detailed comments to the Senate Finance and House Ways and Means Committees on like-kind exchanges and other pending tax issues. (Roundtable Weekly, May 21).  Additionally, in March, The Roundtable and 30 national real estate, housing, environmental, farming, ranching, and forestry organizations wrote to key policymakers to underscore the vital importance of real estate like-kind exchanges. (Roundtable Weekly, March 19)

The coalition “1031 Builds America” provides an online method for stakeholders to share their experiences with LKEs with members of Congress, and urge them to preserve Section 1031. 

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Senate Finance Committee Chair Introduces Bill to Restrict 20% Pass-through Business Income Deduction

Posted on by Trey Jackson

Senate Finance Committee Chairman Ron Wyden (D-OR), above, unveiled new legislation this week that would phase out the 20-percent pass-through business income deduction for taxpayers earning more than $400 thousand a year. (CNBC, July 21 and Wyden news release, July 20) 

  • The current deduction for qualified business income (Section 199A) allows certain taxpayers, such as sole proprietors, partners in partnerships and shareholders of S-corporations, to deduct up to 20% of their net business income.
  • The deduction was enacted as part of the 2017 Tax Cuts and Jobs Act (TCJA), which  reduced the corporate tax rate by 40%. Since the vast majority of American businesses are taxed as pass-throughs, the deduction ensured that the benefits of TCJA were more evenly distributed.

Why It Matters

  • Section 199A is currently scheduled to expire at the end of 2025. Wyden’s proposed overhaul, if enacted, would start with the 2022 tax year. (CQ and BGov, July 20 | one-page summary  | text of the bill)
  • Wyden estimated that his Small Business Tax Fairness Act could raise $147 billion in revenue, based on a Joint Committee on Taxation analysis from 2018. The Senate Finance Committee Chairman also noted that he may add the bill to the Biden administration’s $3.5 billion “human” infrastructure proposal later this fall. (Tax Notes, July 21) 

Roundtable Response 

  • The Roundtable, as part of a broad business coalition, last month expressed strong opposition to any reductions or repeal of the Section 199A deduction – including phasing it out above a certain income threshold – to the leadership of the tax-writing Senate Finance and House Ways and Means Committees. (Coalition letter, June 22 and Roundtable Weekly, June 25) 
  • The coalition’s letter emphasized how nearly 40 percent of individually- and family-owned businesses closed their doors during the COVID pandemic – and that Section 199A provided critical tax relief during that time.
  • “There are nearly two million real estate partnerships with more than 8.6 million partners in the United States,” said Real Estate Roundtable President and CEO Jeffrey DeBoer, above, in response to the new legislation. “Among other benefits, the pass-through deduction allows these real estate businesses to focus on creating jobs, investing in underserved neighborhoods, and creating productive, sustainable properties that support the local tax base. Congress should permanently extend the pass-through deduction. The proposed restrictions are a step in the wrong direction.”   

President Biden proposed phasing out the Section 199A deduction for qualified business income above $400,000 during his presidential campaign. However, that proposal was not included in his Build Back Better agenda released earlier this year or his formal budget proposal. (Tax Notes, July 21) 

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Roundtable-backed Bipartisan Bill Would Correct Condo Construction Tax Accounting Issue; Roundtable Joins Coalition Letter in Defense of Pass-Through Deduction

Posted on by Trey Jackson

residential construction condo

Two senior members of the House Ways and Means Committee introduced bipartisan legislation this week that would correct current condominium tax accounting rules.

Condo Accounting Relief

  • House Ways and Means Committee members Bill Pascrell Jr., (D-NJ) and Vern Buchanan, (R-FL) on June 22 announced the Fair Accounting for Condominium Construction Act to encourage greater housing development in high-population and high density-areas. (Pascrell news release)
  • Current condo tax accounting rules require multifamily developers of condominium 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.
  • Homebuilders of single-family homes, townhouses and row houses are not subject to this percentage-of-completion tax accounting rule restriction. As a result, current tax accounting rules discriminate against vertical condominium by unfairly accelerating federal income tax liability for new condominium construction.
  • Rep. Pascrell’s legislation would provide for an exclusion from the percentage-of-completion method for condo construction.

Roundtable Endorsement

  • Roundtable President and CEO Jeffrey DeBoer said, “The Pascrell-Buchanan legislation will modernize the outdated percentage-of-completion tax accounting rules that discriminate against condominium construction. The bill will reduce the cost of building new housing, especially in high-cost areas where greater density is needed. The Real Estate Roundtable commends the sponsors for introducing a common sense measure that, when enacted, will help expand the nation’s housing supply.” (Pascrell news release)

Section 199A Support

Sen. Ron Wyden with American flag

  • Separately, The Roundtable, as part of a broad business coalition, this week also weighed in on the 20-percent tax deduction for qualified business income (Section 199A), which was enacted as part of the 2017 Tax Cuts and Jobs Act. (Roundtable Weekly, April 2)
  • Senate Finance Committee Chairman Ron Wyden (D-OR), above, reportedly plans to propose changes to Section 199A affecting partnerships, LLCs, and other entities taxed only at the individual owner level. According to BloombergTax, Wyden’s legislation, which is still being drafted, will likely aim to start phasing out the deduction for individuals making above $400,000 in annual business income. Wyden also plans to keep the deduction in place until it is scheduled to expire at the end of 2025.
  • The business coalition’s June 22 letter to the leadership of the tax-writing Senate Finance and House Ways and Means Committees expressed strong opposition to any reductions or repeal of the Section 199A deduction, including phasing out the deduction above certain income thresholds.
  • The coalition’s letter emphasizes how nearly 40 percent of individually- and family-owned businesses closed their doors during the COVID pandemic – and that Section 199A provided critical tax relief.

The June 22 letter adds, “Proposals to limit or repeal the deduction would hurt Main Street businesses and result in fewer jobs, lower wages, and less economic growth in thousands of communities across the country. Such changes would amount to a direct tax hike on America’s Main Street employers, a key reason why the tax plan released by the White House in March left the deduction fully intact.”

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Real Estate Coalition Urges Lawmakers to Preserve Longstanding Carried Interest Tax Rules

Posted on by Trey Jackson

The need for policymakers to preserve longstanding tax law governing partnerships and profits interests – carried interest – was the focus of a June 16 letter sent by The Real Estate Roundtable and 14 other national real estate organizations to congressional tax writers. 

Pending Proposals

  • The Biden administration’s budget includes a proposal to tax carried interest as ordinary income.  The Biden proposal, as well as pending House legislation (the Carried Interest Fairness Act, H.R. 1068), would result in an enormous tax increase on Americans who use partnerships to develop, own, and operate real estate. (Roundtable Weekly, Feb. 27 and April 30)
  • The real estate coalition’s letter emphasized that the proposed changes to taxation of carried interest would:
    • Increase the cost to construct or improve real estate and infrastructure, including workforce housing, senior living communities, industrial properties or investments that support economic inclusion or bring environmental benefits; 
    • Create unintended consequences for local communities. Property taxes on real estate contribute 75 percent of local tax revenue and provide a stable and reliable source of funding for critical public services like education and law enforcement; 
    • Create new tax barriers during the post-COVID era as buildings throughout the country need to be repurposed and converted.

Reality vs. Perception

  • The industry letter to policymakers also countered the false narrative that the carried interest issue targets only a handful of hedge fund billionaires and Wall Street executives. The letter notes the following realities:
    • The IRS reports that real estate partnerships represent half of the four million partnerships in the United States. These two million partnerships and their 8.6 million partners who own and operate multifamily rental housing, office buildings, shopping centers, hotels, distribution centers, senior living communities, and other commercial real estate in every town, city, and region of the country would face damaging impacts.
    • Carried interest involves recognition of the risks a general partner takes, including the funding of predevelopment costs; guaranteeing construction budgets and financing; and exposure to potential litigation.

Retroactive Change

  • The letter also notes that current proposals would limit capital gain treatment only to taxpayers who have cash to invest. Those who invest entrepreneurial innovation, risk taking, and sweat equity would no longer receive capital gain treatment.
  • The proposals would also apply retroactively to partnership agreements executed years, often decades, earlier.  Changing the tax treatment of proposals agreed to years earlier would undermine the predictability of the tax system and discourage long-term investment that encourages economic growth, according to the letter.

The Roundtable’s Tax Policy Advisory Committee (TPAC) met June 16 during The Roundtable’s Annual Meeting to discuss the carried interest proposals and the current tax legislative landscape in Washington. 

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Senate Finance Committee Advances Energy Tax Bill with Enhanced Incentive for Energy Efficient Building “Retrofits”

Posted on by Trey Jackson

The Senate Finance Committee on Wednesday advanced an improved energy efficiency tax deduction for commercial buildings (Section 179D) that would make the incentive more usable for “retrofits” of older buildings, multifamily structures, and REITs. (Clean Energy for America Act (S. 1298), mark-up video and supporting documents)

 Section 179D & CRE 

  • The modified bill introduced by Chairman Ron Wyden (D-OR), above,  included amendments originally proposed by Sen. Ben Cardin (D-MD) to improve Section 179D. Overall, the bill would replace a patchwork of more than 40 energy tax policies with incentives for commercial and residential energy efficiency, clean electricity, and clean transportation fuels, and eliminate fossil fuel subsidies. 
  • The Section 179D enhancements would allow:
    • A retrofit project tax deduction for efficiency investments that lower an existing building’s energy consumption from a “pre-retrofit” baseline measured through EPA’s Portfolio Manager benchmarking tool;
    • All multifamily buildings to qualify for the Section 179D incentive;
    • REITs to benefit from the incentive by allowing the amount of the 179D tax deduction to reduce earnings and profits (“E&P”) in the year that energy efficient equipment is placed in service. 
       
  • The legislation also includes new rules requiring that taxpayers claiming Section 179D or other tax benefits in the bill comply with the Department of Labor’s prevailing wage standards and use qualified apprentices for at least 15 percent of the labor hours associated with any construction, alteration, or repair work on the project.  

Roundtable Recommendations

Davis-Bacon Prevailing Wage Concerns

  • The  Roundtable’s letter opposed new prevailing wage mandates proposed by the bill. The Roundtable warned that the excessive costs from Davis-Bacon compliance will greatly exceed the amount of any tax deduction that Section 179D might provide to incentivize an energy efficient construction project.
  • “Davis-Bacon has never been applied simply because the Internal Revenue Code provides a deduction to lower a private entity’s taxable income,” the letter stated. “The Roundtable recommends that the Clean Energy for America Act avoid unchartered territory that would transform the Internal Revenue Code into a ‘Davis-Bacon Related Act.’”
  • Committee Ranking Member Mike Crapo (R-ID), above, said, “I cannot support attaching labor requirements to energy tax policy. Linking labor policy to energy-related tax credits is unprecedented, and I have concerns not only about the policy, but also about the dangerous precedent it sets for amending the tax code.” 
  • After the committee voted 14-14 along party lines to advance the $260 billion energy tax bill, Chairman Wyden said he would place the bill on the Senate calendar. (CQ, May 26).
  • The bill’s prospects in the full Senate are uncertain, yet specific elements within the bill could be incorporated into a larger economic package proposed by President Biden. Wyden has not said whether he will work to roll the measure into the president’s infrastructure plans. (BGov, May 26)

Energy and tax policies affecting commercial real estate will be a focus of discussions during The Roundtable’s June 15 all-member Annual Meeting – and during its June 16 Tax Policy Advisory Committee (TPAC) and Sustainability Policy Advisory Committee (SPAC) Meetings.

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Real Estate Coalition Weighs In on Infrastructure Funding Options; Roundtable Addresses Tax Proposals and Like-Kind Exchanges

Posted on by Trey Jackson

The Real Estate Roundtable, along with 16 other national real estate trade organizations, submitted detailed comments to the Senate Finance Committee and House Ways and Means Committee, which held hearings this week on how to fund recent Biden Administration  infrastructure investment proposals.

Congressional Consideration

  • The coalition letter states, “As Congress considers options to pay for these investments, we urge policymakers not to erode longstanding tax rules that support job creation, capital formation and productive risk taking. Several of the tax proposals in the Administration’s infrastructure and human capital initiatives, unfortunately, would reduce real estate investment and diminish opportunities for startup businesses and those less advantaged.”
  • The comments focus on recent Biden Administration tax proposals, including:
    • Limiting taxpayers’ ability to defer gain that is reinvested in property of a like-kind;
    • Nearly doubling the tax rate on long-term capital gains;
    • Limiting capital gains treatment to invested cash and disregarding other forms of risk taken by partners; and
    • Making death a taxable event at far lower levels of income and potentially taxing the unrealized gain on appreciated assets not once but twice when an individual dies. 

Economic Impact 

Dramatic sunset over the US capitol in Washington DC
  • The letter states, “(President Biden’s) American Jobs Plan and American Families Plan offer credible initiatives to address many of our Nation’s most pressing needs, such as a modernized infrastructure, a more comprehensive approach to climate-related matters, and increased investments in housing, education, and childcare. We support aggressive steps to finance infrastructure needs, increase the supply of affordable housing, expand the economy, and promote job growth. Regrettably, some of the tax proposals accompanying the plans would reduce economic activity and opportunities and be completely counterproductive to the goals of the President’s initiatives.”
  • The coalition comments detail how the Biden tax proposals would undercut the tax base in localities throughout the country that rely on real estate taxes to finance schools, police, and other first responders. It also notes how the proposed taxes would diminish the incentive for private investment of capital in riskier real estate projects, such as affordable housing and redevelopment in struggling communities.
  • The letter also cites an April 2021 EY study commissioned by the Family Business Estate Tax Coalition, which includes The Real Estate Roundtable, that shows the impact of a specific proposal that would impose tax on transferred assets at death. The study found that repealing stepped-up basis and taxing unrealized gains at death would result in reduced job growth, lower wages, and a reduction in GDP of roughly $10 billion per-year. 

Tax Issues & LKEs 

  • Among the other industry leaders scheduled to participate in the May 25 event are the following Real Estate Roundtable Members:
  • A list of all participants is on the event website.
  • DeBoer was also quoted in Commercial Observer on May 18 on President Biden’s proposal to limit the use of Section 1031 like-kind exchanges. “Exchanges reduce the need for outside financing, leading to less leverage and debt on U.S. real estate. As a result, exchanges allow cash-strapped minority-, women- and veteran-owned businesses to grow their business by temporarily deferring tax on the reinvested proceeds,” DeBoer stated. 

President Biden’s proposals, congressional action and the industry response will be a focus of discussion at The Roundtable’s June 15 Annual Meeting and its Tax Policy Advisory Committee (TPAC) Meeting on June 16.

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Capitol Hill Lawmakers Consider Tax Measures to Finance Infrastructure and other National Priorities

Posted on by Trey Jackson

Democratic and Republican policymakers this week debated options for financing new investments in infrastructure and human capital, including tax proposals that could affect commercial real estate and incentives for capital formation.

Stepped-up Basis

  • A May 12 House Ways and Means subcommittee hearing focused on “Funding Our Nation’s Priorities: Reforming the Tax Code’s Advantageous Treatment of the Wealthy.” (Tax Notes, May 13)
  • Several hearing witnesses testified in favor of recent tax proposals to repeal stepped-up basis upon death, including a recent bill introduced by Sen. Chris Van Hollen (D-MD). (Roundtable Weekly, April 2. Van Hollen news release, March 29 and section-by-section bill explanation).
  • Concerns exist among Democrats about Biden’s tax plans, which range from eliminating stepped-up basis to raising the corporate tax rate and increasing tax rates on wealthy investors. (Washington Post, May 11 and RollCall, May 6)
  • More than a dozen House Democrats sent a May 6 letter to their leadership emphasizing how the elimination of stepped-up basis could threaten farms and family businesses. “Farms, ranches, and some family businesses require strong protections from this tax change to ensure they are not forced to be liquidated or sold off for parts, and that need is even stronger for those farms that have been held for generations,” according to the letter. [Rep. Jim Costa (D-CA) news release and Roll Call, May 6]
  • President Biden backed elimination of stepped-up basis during his campaign. (CNBC, “This is how Joe Biden will tax generational wealth transfer,” March 13, 2020 / CNBC, June 30, 2020 / ABC News, Oct. 8, 2019)
  • The Real Estate Roundtable, along with other members of the Family Business Estate Tax Coalition, recently released a report by EY’s Dr. Robert Carroll, Treasury’s former top tax economist, which found repealing stepped-up basis would result in reduced job growth, lower wages, and a reduction in GDP of roughly $10 billion per-year. 
  • The EY report, Repealing Step-Up of Basis on Inherited Assets:  Macroeconomic Impacts and Effects on Illustrative Family Businesses, concluded that, “Many family-owned businesses have value tied up in illiquid land, structures, and equipment that may need to be liquidated, or leveraged to finance loans, to pay for the new tax burden at death.”  The one-time capital gains tax could “limit[] the business’ viability as an ongoing concern.”

 Energy Tax Legislation

  • Senate Finance Committee Chair Ron Wyden (D-OR) in a May 12 statement said the committee will begin consideration this month of infrastructure and jobs legislation, starting with a markup on energy tax measures. “Following the clean-energy markup, the committee plans to consider additional key pieces of our jobs and infrastructure agenda,” according to the statement. (The Hill, May 12)
  • The Finance Committee on May 18 will hold a hearing entitled “Funding and Financing Options to Bolster American Infrastructure.”
  • Sen. Wyden last month introduced the Clean Energy for America Act, which would revamp tax incentives directed at buildings, electricity and transportation.  (Roundtable Weekly, April 30)
  • Wyden’s bill includes reforms to the 179D deduction for energy efficient commercial and multifamily buildings – with the value of the incentive increasing as more energy is conserved. (Text of the legislation, one-page summary of the bill and a section-by-section summary.)
  • A broad coalition of real estate, environmental, and manufacturing groups led by The Roundtable supports the E-QUIP Act (H.R. 2346), which proposes “accelerated depreciation” for high-performance equipment installed in commercial and multifamily buildings. The coalition is urging Senate and House policymakers to include this measure as part of any “green tax” package that may be folded into larger infrastructure spending legislation. (Roundtable Weekly, April 2)
  • Roundtable President and CEO Jeffrey DeBoer emphasized an important distinction between energy incentives affecting CRE. “The 179D incentive relies on the energy performance of an entire building, without accounting for its age or tenant usage. By contrast, E-QUIP focuses on an individual building’s components – each one capable of contributing to a reduction in overall energy consumption. The E-QUIP incentive would therefore therefore apply to all buildings more efficiently, despite their age or tenant base, and increase energy performance across all asset classes.”

Like-Kind Exchanges

  • Among the many tax issues on The Roundtable’s 2021 policy agenda is the Biden administration’s proposal to cap real estate profits that can be deferred in a 1031 like-kind exchange to $500,000.
  • On May 11, The Wall Street Journal reported on the significant impact the proposal would have on the multifamily market, which utilizes 1031 exchanges as a primary source of capital.  Additionally, the May 7 issue of Realtor Magazine focused on how the 1031 proposal could present adverse consequences for communities and their economic development.  
  • The Real Estate Roundtable, along with 30 other national real estate, housing, environmental, farming, ranching, forestry, and financial services-related organizations, wrote to key policymakers on March 16 to raise awareness of how 1031 exchanges support jobs, economic development, local communities, property taxes, and the supply of rental housing, among other benefits. (Roundtable Weekly, March 19)
  • Between 10-20 percent of all commercial real estate transactions involve a like-kind exchange. The coalition’s letter describes how like-kind exchanges under section 1031 of the tax code helped stabilize property markets at the height of the COVID-19 lockdown, and will continue to facilitate repurposing of real estate assets in the post-COVID economy. 
  • Roundtable Senior Vice President & Counsel Ryan McCormick on May 18 will discuss the economic contributions of like-kind exchanges to the U.S. economy during an Institute for Portfolio Alternatives (IPA) Summit session. 

REITs

  • Reps. Tom Suozzi (D-NY) and Darin LaHood (R-IL) on May 11 introduced the bipartisan Parity for Non-Traded REITs Act (H.R. 3123) to boost investment in commercial real estate and infrastructure. In 2015, Congress increased the amount of equity that a foreign shareholder can invest in a U.S. exchange-traded REIT to 10 percent without generating tax liability under the Foreign Investment in Real Property Tax Act of 1980 (FIRPTA).  The Suozzi-LaHood bill would extend the same 10 percent FIRPTA exemption to publicly offered but non-exchange-traded REITs.
  • “Given the current economic environment and the need for additional investment in U.S. real estate, updating existing FIPRTA rules applicable to public non-traded REITs will expand available capital, create parity with exchange traded REITS, and level the playing field for investors – thereby encouraging more foreign investment in U.S. real estate and generating economic and job growth at home,” said Rep. LaHood. (Institute for Portfolio Alternatives, May 7)

Roundtable President and CEO Jeffrey DeBoer will discuss the wide-range of tax proposals noted above, and others addressed in the organization’s 2021 policy agenda, during a May 18 Marcus & Millichap webcast, “Tax Reform: a CRE Game Changer?”

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Biden Proposes $1.8 Trillion “American Families Plan” Funded by Tax Increases

Posted on by Trey Jackson

Biden Joint Address to Congress

President Biden on April 28 outlined a $1.8 trillion American Families Plan that would fund an expansion of government support for child care, education, paid family leave and other “human infrastructure” initiatives through new tax increases. [Full text of the President’s prepared remarks and CNBC, April 29)

  • Biden proposes to pay for The American Families Plan with tax increases on upper-income taxpayers and new tax enforcement initiatives, including significantly higher tax rates on capital investment. Collectively, the Administration claims these changes would raise $1.5 trillion over 10 years. (American Families Plan Fact Sheet)

Roundtable Response

Jeff DeBoer RER Meeting

  • Real Estate Roundtable President and CEO Jeffrey DeBoer, above, said,  “President Biden’s American Jobs Plan and American Families Plan offer very credible initiatives to address some of our nation’s most pressing needs—a modernized infrastructure, a more comprehensive approach to climate-related matters, as well as increased investments in housing, education and child care.”
  • DeBoer also warned, “As policymakers consider the options to raise this needed revenue, we strongly urge that the focus be on broad-based tax increases that do minimal damage to job creation, risk taking and entrepreneurial activity. Unfortunately, particularly when considered in total, many of the tax proposals accompanying the American Jobs Plan or American Families Plan would reduce economic activity, impede job growth, and diminish opportunities for startup businesses and those less advantaged. The current law in these areas may be in need of review and reform, but repealing these incentives is simply not wise.” (Full Roundtable statement)

Specific Tax Increases

Oval Office Meeting

  • The tax proposals in the American Families Plan include increasing the top tax rate on ordinary income from 37 percent to 39.6 percent, which would impact single filers with income above about $453,000 and married couples with income above approximately $509,000, a White House official said. (The Hill, April 29)
  • Raising the tax rate on capital gains and dividends from 20 percent to 39.6 percent for households making over $1 million. (Tax Foundation, April 23)
  • Restricting gain deferred through like-kind exchanges to no more than $500,000 per-year. (Wall Street Journal, April 28)
  • Stepped-up basis: Taxing unrealized gains in excess of $1 million ($2.5 million per couple) at death, but with an exception for family-owned businesses passed on to heirs who continue to run the business. (American Families Plan Fact Sheet)
  • Reforming the current tax treatment of carried interest: (GlobeSt, April 29)
  • Expanding the 3.8% Medicare tax on earnings and net investment income to apply to additional activities currently outside the scope of the tax.
  • Permanently extending the 2017 Tax Cuts and Jobs Act (TCJA) provision, section 461(l), that restricts the deductibility of active pass-through business losses to $250,000 for an individual or $500,000 for a married couple.
  • Notably absent from the American Families Plan are any proposals related to reinstating the deduction for state and local taxes (SALT).

What’s Next

  • Several Senate Democrats have signaled they do not support all the tax increase proposals. Sen. Sen. Joe Manchin (D-WV), a pivotal centrist lawmaker, along with Sens. Mark Warner (D-VA) and Bob Menendez (D-NJ), members of the Senate Finance Committee, voiced concerns that higher capital gains rates could slow economic growth, according to the Wall Street Journal. 
  • Menendez commented on the proposed increase, “For me, it is what you’re doing, the totality of the package, and how does it affect the ability of growth to continue to take place. That’s how I’m judging it. Right now it seems like a rather high rate to me.”

President Biden plans to host his first meeting since taking office with House and Senate leaders from both parties on May 12, according to a White House official. (BGov, April 29)

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