Tax Policy – Page 9 – The Real Estate Roundtable

State and Local Tax (SALT) Deduction Relief in Doubt as Democrats Seek to Narrow Build Back Better Act

Posted on January 29, 2022October 27, 2023 by Trey Jackson

Several Democratic Senators favor retaining current law as it relates to the deductibility of state and local taxes and eliminating SALT relief from any pared down version of the Build Back Better (BBB) Act, The Hill reported on Jan. 26.

SALT Fix

Speaking both on the record and anonymously to The Hill, policymakers said that they expect proposed changes to SALT will be cut from the next generation of the BBB Act, despite the issue being a top priority of Senate Majority Leader Chuck Schumer (D-NY).
The 2017 Tax Cuts and Jobs Act limited the itemized, individual deduction for state and local taxes (including property taxes) to $10,000. The provision does not restrict the deductibility of business taxes paid or incurred at the entity level. The limitation expires after 2025. (The SALT Cap: Overview and Analysis, Congressional Research Service, March 6, 2020)
Sen. Joe Manchin (D-WV), a key centrist vote in the Senate, has not publicly stated his position on SALT relief, but reportedly has sent signals he is not a supporter. (Politico, Jan. 27 and Roll Call, Jan. 28)

SALT & BBB

If negotiations resume, congressional Democrats are expected to reduce the size and scope of the BBB Act. Manchin recently said he prefers “starting from scratch” after Democratic negotiations on the House-passed $2.2 trillion package collapsed in December. (Roundtable Weekly, Jan. 21)
There are also challenges in the House, where Democrats have only a four-vote majority. “No SALT, no deal,” wrote New York Rep. Tom Suozzi and New Jersey Reps. Josh Gottheimer and Mikie Sherrill in a joint statement last week. “If there are any efforts that include a change in the tax code [in a revised BBB proposal], then a SALT fix must be part of it.” (CNBC, Jan. 21)

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Roundtable Members Engage Policymakers on Economic, Energy, ESG and Other National Issues

Posted on January 29, 2022October 27, 2023 by Trey Jackson

The Real Estate Roundtable’s Virtual 2022 State of the Industry (SOI) Meeting this week included discussions with national policymakers and industry leaders on the future of the Build Back Better (BBB) Act, the Fed and monetary policy, energy policy, regulatory oversight of ESG reporting, along with equity, diversity and inclusion issues in CRE. The Roundtable’s policy advisory committees also met, drilling down on timely issues with policy and industry experts in the areas of tax, sustainability, capital and credit, and homeland security.

Speakers & Policy Issues

Roundtable Chair John Fish (Chairman and CEO, Suffolk), right, and Roundtable President and CEO Jeffrey DeBoer, left, launched the meeting and led discussions with three U.S. Senators and other prominent policymakers, including:

Sen. John Thune (R-SD)
Senate Republican Whip
Committees: Senate Commerce, Finance, Agriculture
… joined Roundtable Board Member Ross Perot. Jr. (Chairman, Hillwood) to discuss upcoming Senate legislation and the political outlook.

Sen. Amy Klobuchar (D-MN)
Committees: Joint Economic, Senate Commerce, Judiciary, and Rules
… expressed her support for the recently-enacted bipartisan infrastructure bill and additional pandemic aid for the hard-hit tourism industry and hospitality sectors.

Sen. Catherine Cortez Mastro (D-NV)
Committees: Senate Finance, Banking, and Energy
… noted her support for expanding the low-income housing tax credit to build affordable homes for working families, along with business incentives to invest in energy efficiency projects.

John Kerry
President Biden’s Special Envoy for Climate and former Secretary of State
… discussed the significant role of the real estate industry in efforts to combat the impact of climate change and emphasized the need for nations to adopt new green energy technologies.

Larry Summers
Former Treasury Secretary under President Clinton and Former White House National Economic Council Director under President Obama
… discussed a wide range of policy topics, including his views on the Fed’s reaction to market volatility, inflation, and the tight labor market. (Watch Summers video)

Equity, Diversity & Inclusion

The SOI meeting also included a discussion about exploring a potential industry initiative that would aim to accelerate opportunities for minority and women business enterprises (MWBEs) in the commercial real estate industry.

The goals of the initiative were discussed by The Roundtable’s Equity, Diversity and Inclusion (E,D&I) Committee Chairman, and Roundtable Board Member, Jeff Blau (CEO, Related Companies); Ken McIntyre, CEO of The Real Estate Executive Council; and Thomas Baltimore, Jr., Chairman, President and CEO of Park Hotels & Resorts.

Roundtable Policy Advisory Committees

(Above: Sustainability Policy Advisory Committee (SPAC) Chair Tony Malkin (Chairman, President and CEO, Empire Realty Trust), right, and Roundtable SPAC Liaison, Senior Vice President and Counsel Duane Desiderio, left.)

The Roundtable’s policy advisory committee meetings on Jan. 25-26 analyzed national issues impacting CRE, including:

Research and Real Estate Capital Policy Advisory Committees (RECPAC)
Rep. French Hill (R-AR) provided his insights on the congressional legislative agenda from his perspective as a member of the House Financial Services Committee and Ranking Member of its Subcommittee on Housing, Community Development and Insurance. Research Committee co-chairs Spencer Levy (CBRE’s Global Chief Client Officer) and Paula Campbell Roberts (KKR Managing Director) provided their perspectives on real estate capital markets. RECPAC co-chair Kathleen Farrell, Head of Commercial Real Estate for Truist, moderated a joint committee meeting capital market discussion, along with co-chairs Gregg Gerken, Head of Commercial Real Estate with TD Bank, and Mike Lowe, Co-CEO with Lowe.
Tax Policy Advisory Committee (TPAC)
Potential tax revenue policies that may be considered by Congress were a focus of a discussion moderated by Russ Sullivan (Brownstein Hyatt Farber Schreck) with Bethany Bell, staff director for the House Ways and Means Subcommittee on Select Revenue Measures. Additionally, Derek Theurer, chief tax counsel for Ways and Means’ Republicans, discussed tax legislative priorities prior to the upcoming mid-term elections.
Homeland Security Task Force (HSTF)
HSTF members were briefed on the escalation of organized “smash and grab” looting incidents affecting the retail sector by Dan Kennedy, Senior Vice President of US Security Operations for Unibail-Rodamco-Westfield, Chris Woiwode, Vice President and Chief Security Officer for Macerich and Terry Monahan, former New York City Senior Advisor for Recovery Safety Planning and NYPD Department Chief. Additionally, HSTF co-chairs Amanda Mason (Executive Director of Global Intelligence for the Related Companies) and Keith Wallace (Vice President for Global Safety & Security with Marriott International) led HSTF in a discussion on current threats to CRE and mitigation strategies. (HSTF on Jan. 20 held a virtual exercise simulating hostile events and adverse weather impacting CRE).

Sustainability Policy Advisory Committee (SPAC)
Environmental Protection Agency (EPA) staff demonstrated a new, powerful Building Emissions Calculator to estimate historical, current and future annual greenhouse gas emissions resulting from a building’s energy use. SPAC also discussed the SEC’s expected rule on Environmental, Social, and Corporate Governance (ESG) reporting requirements. (Reuters, Jan. 19). Additional speakers from the U.S. Energy Information Administration provided an update on the Commercial Building Energy Consumption Survey (CBECS), which tracks federal data on U.S. CRE energy use.

Next on The Roundtable’s FY2022 meeting calendar is the Spring Meeting on April 26. This meeting is restricted to Roundtable-level members only.

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Roundtable Offers 2022 Tax Policy Overview in CBRE’s Market Outlook Podcast

Posted on January 15, 2022October 27, 2023 by Trey Jackson

How national tax policies may affect commercial real estate and the outlook for market sectors were the focus this week of a CBRE podcast, “High Hopes: Why Commercial Real Estate Is Poised for Continued Growth in 2022” that included Roundtable Senior Vice President & Counsel Ryan McCormick.

Tax Policy Issues

McCormick emphasized that tax increase proposals affecting CRE could receive renewed attention in 2022 if the President, congressional leaders, and key centrist Democrats sit down to renegotiate major elements of the Build Back Better Act. (CBRE Podcast, Jan. 11)
“We started last year with a tremendous amount of potential change on the table, potential risks for real estate,” including “changes to the taxation of capital investment, capital formation, capital gains . . . pass-through rates and just rates generally,” McCormick noted. In his initial budget, the President proposed “limiting like-kind exchanges, eliminating the step-up in basis of assets at death, and other changes,” he added.
As the process unfolded, according to McCormick, the real estate industry was able to demonstrate the negative impact these proposals “would have on not just real estate in particular, but local communities, local governments, property tax revenue at the state and local level and the jobs that flow from those industries and those services that are provided.” (CBRE Podcast, Jan. 11)
Congressional lawmakers, driven by the need to get the key approval vote of Sen. Joe Manchin (D-WV) in an evenly divided Senate, are likely to pare back the cost of the $1.75 billion BBB bill to restart negotiations. (Roundtable Weekly, Jan. 7)
McCormick added, “The Build Back Better Act is hanging by a thread at this point, and it’s really going back to the drawing board. . . . There’s a lot of different ways and directions things could take. They could go small. They could try to do something on a bipartisan basis. I think the most likely scenario is they whittle back the Build Back Better Act further from where it is today. . . . [I]n many respects, we’re back where we started in 2021.”

The SEC, OZs and SALT

The discussion also touched on the growing influence of ESG factors on the industry, including the expectation that the Securities and Exchange Commission (SEC) may release a proposed rule for reporting financial risks related to climate during the first quarter of this year. (Roundtable Weekly, Oct. 1, 2021)
McCormick expressed optimism that political support for Opportunity Zones, which have raised over $75 billion in capital since their enactment in 2017, would grow over time. The Roundtable and other stakeholders recently urged Congress to extend deadlines for investors to qualify for OZ tax benefits. On Thursday, Senate Finance Committee Chairman Ron Wyden announced an investigation into the impact of OZs on jobs and investment in low-income communities (Roundtable Weekly, Jan. 7; Wyden press release, Jan. 13)
The fate of the deductibility of state and local taxes (SALT) was also a topic in the CBRE podcast.

Roundtable Speakers: Thune, Kerry and Summers

Tax policy in the new year will be a focus of The Roundtable’s Jan. 25 State of the Industry Meeting (remote) and its Tax Policy Advisory Committee (TPAC) meeting on Jan. 26.
Featured speakers at The Roundtable’s business meeting will include: Sen. John Thune (R-SD), the number two position in Senate Republican leadership;
John Kerry, President Biden’s Special Envoy for Climate and former Secretary of State; and

Larry Summers, former Secretary of the Treasury and former Director of the White House National Economic Council.

Looking Ahead

The Jan. 11 CBRE podcast – moderated by Spencer Levy, CBRE’s Global Chief Client Officer & Senior Economic Advisor and co-chair of The Roundtable’s Research Committee – also featured Richard Barkham, CBRE’s Global Chief Economist, Head of Global Research & Head of Americas Research. Barkham focused on the economic outlook and forecasts for capital markets and individual CRE sectors. (GlobeSt, Jan. 12)
CBRE’s recently released publication, U.S. Real Estate Market Outlook for 2022, projects a growing U.S. economy will fuel demand for space and increase real estate investment across all property types – despite uncertainty from the omicron variant and other risks.

The Real Estate Roundtable’s Policy Agenda for 2022, scheduled for release at the end of this month, will address the tax issues above and several more of importance to CRE in the areas of infrastructure, sustainability, capital and credit, and homeland security.

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Congress Extends Government Funding Until February 18, Faces Debt Ceiling Deadline; Senators Begin Consideration of Build Back Better Act

Posted on December 4, 2021October 27, 2023 by Trey Jackson

A Continuing Resolution (CR) that would fund the government until Feb. 18 passed the House yesterday and the Senate last night, sending the bill to President Biden for his signature to avoid a partial government shutdown at midnight. (CNBC, Dec. 2). Senate leaders this week also continued negotiations to extend the national debt ceiling to avoid default and began discussions about potential changes to the House-passed $1.7 trillion Build Back Better (BBB) Act. [Further Extending Government Funding Act (H.R. 6119) and section-by-section summary]

Debt Ceiling Looms

Treasury Secretary Janet Yellen and the Congressional Budget Office this week urged Congress to increase the debt ceiling as soon as possible to avoid a national default in December. (Bloomberg, Nov. 30)
Yellen testified Monday before the Senate Banking Committee about the need to increase the debt limit. She stated, “If we do not, we will eviscerate our current recovery. In a matter of days, the majority of Americans would suffer financial pain as critical payments, like Social Security checks and military paychecks, would not reach their bank accounts, and that would likely be followed by a deep recession.” (The Hill, Nov. 30 and Yellen testimony)
Senate Majority Leader Chuck Schumer (D-NY) and Senate Minority Leader Mitch McConnell (R-KY) expressed optimism this week about their discussions to raise the federal government’s $28.9 trillion debt limit soon. (Reuters, Nov. 30)

BBB Act & Tax Issues

House Ways and Means Chair Richard Neal (D-MA), above, on Wednesday stated that a vote on the BBB package may be pushed into next year, given the urgent agenda Congress faces this month. (BGov, Dec 1)
The House-passed BBB Act and its potential impact on the taxation of real estate was also the focus of a Nov. 30 report in Commercial Property Executive – “Tax Policy Largely Stays the Course for CRE Execs.” Roundtable President and CEO Jeffrey DeBoer was quoted in the article – “I think that there has been a clash between expectations and reality. Expectations were high because Biden won, he had a Democratic House, and the Senate was 50/50. But the reality is that none of these issues are easy.”
The current BBB bill – when compared to the President’s budget and the bill passed by the House Ways and Means Committee in September – reflects major progress on a number of tax issues important to real estate and prioritized by The Real Estate Roundtable. (Roundtable Weekly, Oct. 29)
The current bill would not limit like-kind exchanges, increase the 20% capital gains tax, or cap eligibility for the 20% pass-through business income deduction. It also does not include changes in the tax treatment of carried interest or repeal the step-up in basis of assets at death. The key tax issues in the bill are addressed in a Roundtable comparison of the tax-related provisions in the BBB package.

Green Energy Provisions

The Senate this week also began consideration of the BBB Act following the House’s passage of the multitrillion-dollar legislation on Nov. 19. Clean energy tax credits make up the most significant portion of the BBB Act’s climate policies.
Schumer and Senate Energy and Natural Resources Chair Joe Manchin (R-WV) met this week to discuss climate policies in the House package. E&E News reported, “Manchin said he is negotiating ‘adjustments’ to the energy and climate provisions of his party’s $1.7 trillion social spending bill, in what could be part of a larger suite of changes to the legislation as it moves through the Senate.”
The Roundtable on Nov. 16 sent a letter to congressional tax writers detailing five recommendations that would improve green energy tax provisions in the BBB Act affecting real estate. (Roundtable Weekly, Nov. 19)
The letter’s recommendations, listed below, would increase and scale deployment of low- and zero-carbon technology in the nation’s commercial and multifamily building infrastructure.

Clarify that “thermal energy storage systems” are eligible for incentives under the Section 48 Investment Tax Credit.
Further revise the 30C tax credit to support EV chargers in the non-public, but widely used, parking lots and garages that serve America’s residential and business tenants who seek to conveniently “charge-up” while at home or at work.
Better align the BBB Act with the Biden Administration’s long-term climate strategy – by providing accelerated depreciation and other incentives for heat pumps and other components that “electrify” commercial and multifamily buildings.
Induce more “retrofits” of aging buildings by allowing taxpayers to claim the 179D deduction in the year high-efficiency equipment is placed in service.
The inclusion of Davis-Bacon and apprenticeship hiring will seriously undermine climate goals – because the high costs to comply with these labor standards will more than offset the BBB Act’s “bonus rates” for clean energy projects. Congress should not hinge the “bonus rates” on unrelated labor issues that fail to accelerate achievement of GHG reduction strategies.

Fiscal policy, the BBB Act and how it may affect tax and climate issues of importance to CRE will be topics for discussion at The Roundtable’s Jan. 25-26 State of the Industry Meeting in Washington, DC.

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House Passes Build Back Better Act, Roundtable Urges Improvements to Green Energy Tax Provisions

Posted on November 19, 2021October 27, 2023 by Trey Jackson

House Democrats passed their “sweeping” reconciliation package of tax, health care, education, and climate initiatives Friday morning, a step that advances a “centerpiece” of President Biden’s domestic agenda and represents “the most significant restructuring of the [social] safety net in decades.” (Politico, Nov. 19)

President Biden lauded the House’s action in a statement released by the White House this morning.

Partisan Bill Advances to the Senate

All Democrats (except one) supported the $1.7 trillion Build Back Better Act (H.R. 5376), after months of negotiations between Progressives and Moderates debating the breadth of the measure and scaling back its original price tag north of $3.5 trillion. (Roundtable Weekly, Nov. 5) No House Republican voted for the bill.
Today’s party-line vote took place after the Congressional Budget Office submitted a cost analysis that satisfied the requirements of a crucial group of Democratic Moderates needed to approve the legislative package. (CBO, Nov. 18 and text of the budget reconciliation bill.)
The legislation now moves to the Senate where it will face additional scrutiny and could be reduced further in scope. If the Senate ultimately passes the BBB Act in a manner that changes the House-approved version, the bill would need to go back to the House for another vote before it reaches President Biden’s desk.
Passage of the BBB Act follows on the heels of the enactment of the bipartisan bill to upgrade the nation’s transportation, water, grid, broadband, and other “physical” infrastructure. President Biden signed the $1.2 trillion Infrastructure Investment and Jobs Act into law on Monday. (Washington Post, Nov. 15). The Roundtable has strongly supported bipartisan investments to modernize the nation’s physical infrastructure. (Roundtable Weekly, Nov. 12).

Progress on CRE Tax Issues

Relative to President Biden’s budget and the initial bill passed by the Ways and Means Committee, the House-passed BBB Act reflects continued progress on a number of tax issues important to real estate and prioritized by The Real Estate Roundtable. (Roundtable Weekly, Oct. 29) Critically, the current bill does not:

Limit like-kind exchanges (sec. 1031),
Increase the capital gains tax rate,
Restrict the 20% pass-through business income deduction (sec. 199A),
Tax unrealized gains at death or repeal of the step-up in basis of assets,
Change the tax treatment of carried interest, and
Restrict estate tax valuation discounts.

Roundtable Recommends Changes to Clean Energy Tax Provisions

The BBB Act’s suite of clean energy tax credits and incentives comprise the legislation’s biggest measures to fight climate change. (Roundtable Weekly, Oct. 29)
The Roundtable sent a letter to Congressional tax writers on Tuesday detailing five recommendations that aim to improve green energy tax provisions affecting real estate. The Roundtable’s letter urged changes to the BBB Act that would further the objectives to slash GHG emissions and make rapid progress toward a “net zero” economy by mid-century. (Roundtable letter, Nov. 16)
The letter’s recommendations, listed below, would increase and scale deployment of low- and zero-carbon technology in the nation’s commercial and multifamily building infrastructure.

Clarify that “thermal energy storage systems” are eligible for incentives under the Section 48 Investment Tax Credit.
Further revise the 30C tax credit to support EV chargers in the non-public, but widely used, parking lots and garages that serve America’s residential and business tenants who seek to conveniently “charge-up” while at home or at work.
Better align the BBB Act with the Biden Administration’s long-term climate strategy – by providing accelerated depreciation and other incentives for heat pumps and other components that “electrify” commercial and multifamily buildings.
Induce more “retrofits” of aging buildings by allowing taxpayers to claim the 179D deduction in the year high-efficiency equipment is placed in service.
The inclusion of Davis-Bacon and apprenticeship hiring will seriously undermine climate goals – because the high costs to comply with these labor standards will more than offset the BBB Act’s “bonus rates” for clean energy projects. Congress should not hinge the “bonus rates” on unrelated labor issues that fail to accelerate achievement of GHG reduction strategies.

Next: The Senate in December

The Senate will take up the House BBB bill in December. Democrats will need the support of moderate Senators Joe Manchin (D-WV) and Kyrsten Sinema (D-AZ) to pass BBB legislation in the evenly divided upper chamber using budget reconciliation rules. However, Manchin recently stated he may withhold his support of the bill until next year due to rising inflation rates. (Newsweek, Nov. 16 and Axios, Nov. 10)
Additionally, House lawmakers included six pages of technical changes in their BBB bill that could help it pass the scrutiny of the Senate Parliamentarian, who can remove certain House provisions if she determines they are incompatible with Senate rules.

Congress is scheduled to return from the Thanksgiving break on Dec. 3. Treasury Secretary Janet Yellen this week warned that if lawmakers do not take action to lift the legal debt ceiling by Dec. 15, they will risk a government default on its debt obligations. (Wall Street Journal, Nov. 16)

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Democrats’ Revised Tax Plan Includes Changes and Improvements Important to Real Estate and Other Pass-through Businesses

Posted on October 30, 2021October 27, 2023 by Trey Jackson

This week’s frenzy of infrastructure negotiations in Washington was capped off by the White House’s release yesterday of a pared down, $1.75 trillion framework agreement on “human” infrastructure legislation, which trimmed back potential tax increases on commercial real estate and other pass-through businesses. (CQ, Oct. 30 and Tax Notes, Oct. 29)

Dynamic Negotiations

By introducing revised legislation – the Build Back Better Act (H.R. 5376) – Democratic leaders hoped to create momentum for a vote on the separate, bipartisan “physical” infrastructure bill. Their effort was unable to secure the necessary support for an immediate vote from House progressives. (Section-by-section bill summary and Washington Post, Oct. 29)
Policymakers did pass a short-term extension of surface transportation programs until Dec. 3– the same day that funding for the government will run out and within the time frame for addressing the current debt ceiling. (Punchbowl News, and BGov, Oct. 30)
Roundtable President and CEO Jeffrey DeBoer commented on the evolving infrastructure legislative developments in an interview this week with American City Business Journals. DeBoer noted that as the bill’s cost has come down, policymakers have eliminated many proposed tax increases.
“We very much want to see the physical bipartisan infrastructure bill pass. It has been tied in the House to the larger human infrastructure bill, and that legislation is slowly winding its way to the finish line. As the larger bill was put forward, we were concerned about some provisions that we felt might target real estate activities and real estate investment. We tracked all of these various proposals such as mark-to-market and wealth taxes. We’re continuing to monitor developments and ensure that nothing comes up without proper vetting or full understanding of how it would impact CRE,” DeBoer said.

What It Means for CRE

The revised reconciliation bill reflects continued progress on a number of tax issues important to real estate and prioritized by The Real Estate Roundtable. Critically, the current bill includes:
- No limitations on like-kind exchanges (sec. 1031),
- No increase in the capital gains tax rate,
- No restrictions on the 20% pass-through business income deduction (sec. 199A),
- No taxation of unrealized gains at death or repeal of the step-up in basis of assets,
- No changes in the tax treatment of carried interest, and
- No restrictions on estate tax valuation discounts.

Additionally, the revised legislation excludes a complex mark-to-market regime to tax the unrealized gains of billionaires, new tax burdens on grantor trusts, and a provision that would have prohibited IRA investment in many non-listed REITS.

For more information on the tax provisions in the original House bill, see The Roundtable’s summary on Real Estate Tax Issues and Budget Reconciliation Legislation. Also watch the recent Marcus & Millichap webcast on tax policy that featured The Roundtable’s Jeffrey DeBoer, above. (Registration required to view the Marcus & Millichap webcast)

Key Tax Revenue Provisions

In addition to provisions aimed at corporate and international business activities, tax provisions in the framework agreement include:
- Expansion of the 3.8% net investment income tax to cover a much broader range of income – such as capital gains and rents – earned by both active business owners (such as real estate professionals), S corp. shareholders, and limited partners.
- A new proposal to impose a 5% surtax on a taxpayer’s modified adjusted gross income (AGI) over $10M and an additional 3% surtax tax on modified AGI over $25 million.
- Restrictions on taxpayers’ ability to deduct more than $250K (individual) or $500K (married couple) of losses incurred in an active trade or business from their portfolio income or wages.
- Modifications to the portfolio interest exception that exempts interest earned on certain U.S. debt obligations from a withholding tax on outbound interest payments. The exception is sometimes used by foreign institutions when investing in US real estate.
- Clarification that limitation on interest deductibility (sec. 163(j)) applies at the partner or shareholder level, not the entity level.
- Clean Energy tax provisions affecting real estate are covered in the Roundtable Weekly story below.

Dropped Tax Incentives

As the cost of the bill came down, certain tax incentives were eliminated from the package: expansion of the low-income housing tax credit and the credit for rehabilitating historic structures, creation of a new tax credit for home construction in low-income communities for low-income buyers, and new infrastructure tax credit bonds and related infrastructure financing provisions.

Legislative changes to the bill could occur next week on crucial issues such as the SALT deduction, but the timing of action on a final agreement remains uncertain. (Bloomberg, Oct. 29)

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Democrats Struggle to Reach Agreement on “Social Infrastructure” Package as Roundtable’s DeBoer Addresses Real Estate Tax Issues in Play

Posted on October 23, 2021October 27, 2023 by Trey Jackson

Democrats this week struggled to reach agreement on cutting the cost of President Biden’s multitrillion “social infrastructure” proposal as Senator Kyrsten Sinema (D-AZ) opposed any increase in marginal rates for businesses, high-income individuals or capital gains to pay for the package. Democrats aim to pass both the “human” and “physical’ infrastructure packages under a budget reconciliation process that requires approval of all 50 Democrats in the evenly divided Senate. (Wall Street Journal, Oct. 20)

CRE Impact

Real Estate Roundtable President and CEO Jeffrey DeBoer (above) yesterday addressed the fluid nature of the reconciliation bill negotiations during a Marcus and Millichap tax policy webinar. The webcast is available here, but you must be registered to access the discussion.
DeBoer noted that the narrow voting margins in both the Senate and House have created an environment where it is difficult for various factions in Congress to reach consensus. “What we have here is a clash between expectations and reality,” DeBoer said.
He added that the current policy disputes among lawmakers adds uncertainty to the potential outcome. “Could negative tax provisions affecting real estate be put back on the table? Absolutely. What also worries me is that other proposals that we don’t know about yet may suddenly be considered.” (Registration required to view the Marcus & Millichap webcast)
The House Ways and Means Committee voted in September to advance legislation that would finance Biden’s social infrastructure initiatives with a $2.1 trillion tax increase focused on high-income individuals and corporations. The House legislation excluded several tax proposals put forward by the Biden administration and Senate lawmakers that would increase the tax burden on real estate. (Roundtable Weekly, Sept. 17)
The Washington Post today reported that a new “Billionaire Income Tax” proposal from Senate Finance Chair Ron Wyden (D-OR) would “aim to raise hundreds of billions of dollars from the fortunes of America’s roughly 700 billionaires” by applying a tax to those individuals earning over $100 million in income three years in a row. Taxes would be imposed on the increased value of assets such as stocks on an annual basis, regardless of whether those assets are sold. Billionaires would also be able to take deductions for the annual loss in value of those assets. (Washington Post, Oct 22)
Additional tax issues affecting CRE are profiled in The Roundtable’s summary on Real Estate Tax Issues and Budget Reconciliation Legislation.

Tax Uncertainty

The Senate has not acted on any revenue-raising proposals to support President Biden’s original $3.5 trillion infrastructure package. Policymakers are now aiming to pare down the overall reconciliation bill cost to approximately $2 trillion before finalizing measures to pay for the package.
Sen. Sinema (above) yesterday spoke with House Ways and Means Committee Chairman Richard Neal (D-MA) in an effort to break the impasse on how to fund certain infrastructure spending priorities in a scaled-down package. Neal said he is optimistic a deal will be reached. “I did point out that it’s the ninth inning. I mean, when are you going to vet these issues?” Neal said. (The Hill, Oct. 21)
The current reconciliation bill in the House would raise the top marginal income tax rate on many pass-through business owners from 29.6% today to 46.4% (a 57% increase). The Roundtable believes this level of increase on pass-through businesses was unintended by Members of Congress and could undercut the bill’s own objectives.

As negotiations continue among policymakers on a reduced topline number for the social infrastructure package – and the specific programs it would support within a multi-trillion reconciliation bill – The Roundtable continues to urge lawmakers to ensure that any tax changes within a final agreement treats pass-through businesses fairly and equitably. (Roundtable Weekly, Oct. 1 and Oct. 15)

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Roundtable Encouraging Congress to Ensure Fair Treatment of Pass-Through Businesses in Final Reconciliation Bill

Posted on October 2, 2021October 27, 2023 by Trey Jackson

As negotiations continue on a multi-trillion reconciliation bill, The Real Estate Roundtable is urging lawmakers to ensure that any final agreement on tax changes treats pass-through businesses fairly and equitably.

Why It Matters

The reconciliation bill approved by the House Ways and Means Committee excluded several real estate-related tax proposals put forward by the Biden administration that could cause unnecessary harm to job creation, real estate values, and local communities that rely on property tax revenue. These proposals included restrictions on like-kind exchanges, repealing the step-up in basis of assets at death, and tax parity between ordinary income and capital gains. (Roundtable Weekly, Sept. 17)
At the same time, through the combination of several, independent tax changes aimed at upper-income taxpayers, the current reconciliation bill in the House would raise the top marginal income tax rate on many pass-through business owners from 29.6% today to 46.4% (a 57% increase).

Contact Congress

The Roundtable believes this level of increase on pass-through businesses was unintended by Members of Congress and could undercut the bill’s own objectives of stimulating job growth, improving housing availability, and promoting investment in economically struggling communities, among other priorities.
See The Roundtable’s detailed summary on “Pass-Through Businesses and the Reconciliation Bill.”
“Small and closely held businesses are the principal drivers of job growth and entrepreneurial activity in our economy. The increase in the tax burden on pass-through businesses is disproportionately large relative to the tax changes for large, multinational corporations. The bill would create a historically high differential in the tax rates between pass-throughs and C corps and could put pass-through businesses at a competitive disadvantage in the economy. We do not believe this was the intent of the bill drafters,” said Real Estate Roundtable President and CEO Jeffrey DeBoer.
The dramatic increase in the pass-through tax rate results in part from capping the 20% deduction on pass-through business income (section 199A). Other changes include increasing the top tax rate on ordinary income from 37 to 39.6 percent, expanding the scope of the 3.8% tax on net investment income, and imposing a 3% surtax on incomes above $5 million.
As currently proposed, the rate differential between pass-throughs (46.4%) and C corps (26.5%) would be 20 percentage points, more than twice the level of any period over the last four decades. Real estate partnerships constitute half of the four million partnerships in the United States.

Roundtable members and others are encouraged to reach out to their Representatives and contact their Senators to urge them to preserve the 20% deduction for pass-through business income (section 199A), which is directly tied to hiring workers and investing in capital equipment and property. Modest adjustments in the legislation would ensure that pass-through businesses will continue contributing to economic growth, innovation, and job creation. Additional information and talking points can be found here.

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House Ways and Means Committee Advances Historic Legislation with Safety Net Expansion and $2.1 Trillion in Tax Increases

Posted on September 16, 2021October 27, 2023 by Trey Jackson

The House Ways and Means Committee voted to advance legislation that would expand benefits for low-income families, invest in affordable housing and other Democratic priorities, and finance the initiatives with a $2.1 trillion tax increase that primarily falls on high-income individuals, pass-through businesses, and corporations. The legislation excludes several tax proposals put forward by the Biden administration and Senate lawmakers that would increase the tax burden on real estate. (Ways and Means news release and markup resources)

Real Estate Roundtable President Jeffrey DeBoer stated, “The House Ways and Means Committee’s proposals include significant tax increases on corporations and income received by upper income taxpayers, and not on business activities like real estate. Even so, the combined tax hikes on income received from pass-through entities could threaten job creation and business expansion. As the bill moves forward, we encourage Congress to review the suggested tax hikes, particularly those on pass-through businesses, and work to ensure that unnecessary and unintended damage is not done to the economy. Substantial commercial real estate activities are conducted by pass-through entities and these activities create jobs, support retirement savings, and boost tax revenue for critical public services provided by local governments. The Roundtable is encouraged, yet cautious, at this still relatively early stage of the legislative process. Further changes may be on the horizon, both positive and negative.”
Tax issues affecting CRE are summarized in The Roundtable’s summary on Real Estate Tax Issues and Budget Reconciliation Legislation. The real estate tax issues addressed by the W&M Committee include:

Real Property Like-Kind Exchanges (Section 1031)

The bill wisely preserves taxpayers’ ability to defer capital gain when exchanging real property for another property of like kind.

Step-Up in Basis and Taxation of Gains at Death

The bill preserves the step-up in basis that applies to appreciated gain when real estate is transferred from a decedent to an heir. The bill does not impose capital gains tax on appreciated real estate when transferred by a decedent or donor.

Capital Gains

The bill increases the maximum capital gains rate from 20% to 25%. The 3.8% investment tax is maintained and extended to all taxpayers, thus making the effective capital gain tax rate 28.8%. The President’s budget proposed increasing the capital gains rate to 39.6% to create parity between the tax rate on ordinary income and capital gains.

Real Estate Carried Interest

The bill generally extends from 3 years to 5 years the holding period for partnership gains attributable to a profits interest to qualify for the long-term capital gains rate. However, the bill preserves the shorter 3-year holding period for capital gain related to a real property trade or business. The President’s budget proposed converting all carried interest income derived from a profits interest in a real estate partnership to ordinary income.

Pass-Through Business Income Deduction (Section 199A)

The bill limits the maximum deduction available for pass-through business income under section 199A to no more than $400,000 for an individual and $500,000 in the case of a joint return ($2.5 million).

Net Investment Income Tax

The bill would apply the 3.8% net investment income tax to income derived from a trade or business, capital gain, dividends, interest, and rental income regardless of whether the taxpayer is active or passive in the activity.

Other Tax Issues

Other tax issues addressed by the committee included affordable housing, infrastructure financing, grantor trusts, deductibility of active losses and REIT constructive ownership rules. These issues are also summarized in The Roundtable’s summary on Real Estate Tax Issues and Budget Reconciliation Legislation.
House Speaker Nancy Pelosi (D-CA) is expected to address a provision affecting the $10,000 limit on state and local deductions (SALT) before a final bill is assembled for a floor vote. (CNBC, Sept. 15)
The committee’s proposals on clean energy incentives are detailed in the Roundtable Weekly story below on energy policy.

The House is expected to try to resolve major differences between their final bill and the Senate’s version before voting on the package. Senate Majority Leader Chuck. Schumer (D-NY) has not set a formal deadline for the Senate to complete its work but he said Tuesday “there’s going to be a lot of intense discussions and negotiations over the next few weeks.” (RollCall, Sept. 14)

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House Ways & Means Scheduled to Mark-up Revenue Measures Next Week

Posted on September 11, 2021October 27, 2023 by Trey Jackson

Ways and Means Committee wiki

The Real Estate Roundtable continued to weigh in with lawmakers with concerns on a number of Biden administration tax proposals as the House Ways and Means Committee prepared to mark-up tax measures early next week that may potentially affect commercial real estate.

Ways & Means Timeline

Congressional committees are aiming to complete work by Sept. 15 on various portions of the massive infrastructure package, which Democrats will consider under “reconciliation” budget rules that require a simple majority to pass in the narrowly divided Congress. (Wall Street Journal, August 24)
Ways and Means Chairman Richard Neal (D-MA) expects to release details on his revenue proposals over the weekend. The top ordinary tax rate and the corporate tax rate are expected to be a key focus of the committee’s deliberations. (The Hill, Sept. 9)
Ways and Means member Stephanie Murphy (D-FL) stated this week she will vote against the committee’s measures unless more time is available to review the proposals. (CNN, Sept. 9)
Rep. Murphy, a moderate, said she supports the use of reconciliation to enact Democrats’ economic priorities, but at this stage, she said, “I have no choice but to vote ‘no’ on each subtitle and on final passage,” she said. (Roll Call, Sept. 9)
“I don’t know how much we’re spending, how much we’re raising, how we’re spending some of the money and how we’re raising any of the money,” she said. (Murphy statement, YouTube, Sept. 9)

Revenue Raisers

Tax issues grid choice image

President Biden’s tax proposals that may be considered by Ways & Means include:

Like-kind Exchanges (Section 1031)

A coalition of 27 business organizations, including The Real Estate Roundtable, wrote to congressional tax-writing committee leadership on Sept. 7 about how Biden’s proposed legislative restrictions on like-kind exchanges, if enacted, would undermine the economic recovery while causing unintended and unnecessary risks to the strength and stability of U.S. real estate.
The coalition’s letter details how like-kind exchanges under section 1031 support jobs and investment; the health of U.S. commercial real estate and real estate markets; and the preservation of family-owned farms, ranches, and forestland.
Tax Notes on August 9 published an article entitled “The Tax Policy Case for Section 1031” by Roundtable Tax Policy Advisory Committee Member Don Susswein (Principal, RSM US LLP), Roundtable Senior Vice President and Counsel Ryan McCormick and Kyle Brown (Senior Manager, RSM).
The article addresses how like-kind exchanges increase net investment, boost state and local tax revenue, stimulate capital expenditures which leads to job growth, reduce leverage and financial risk, lower rents for households, and support healthy property values. The article also shows how use of section 1031 also creates a ladder of economic opportunity for minority-, veteran-, and women-owned businesses and cash-poor entrepreneurs who may lack access to traditional sources of financing.
Advertising messages on the need to preserve section 1031 will begin running on Sept. 13 in Politico’s Morning Money.

Pass-Through Business Income Deduction (Section 199A)

More than 120 business trade associations, including The Roundtable, are part of the broad-based Main St. Employers coalition, which wrote to Ways and Means Chairman Neal on Sept. 8 about new Biden tax proposals affecting individually- and family-owned businesses. (Coalition letter)
The letter states, “Proposals to raise rates on pass-throughs and C corporations, cap the Section 199A deduction, increase the capital gains tax, and impose capital gains at death would raise taxes on Main Street businesses when they operate, when they are sold, and when they are passed on to the next generation.”

Step-up in Basis and Taxation of Gains at Death

A Sept. 9 letter to congressional tax-writing committee leadership from a large multi-industry trade association coalition that includes The Roundtable strongly opposed Biden administration proposals to death a taxable event for inherited assets and eliminating stepped-up basis.
The Family Business Estate Tax Coalition letter also cited a recent EY report that showed if stepped-up basis were repealed via carryover basis, 40,000 jobs would be lost every year in the first 10 years after enactment and GDP would decrease by $50 billion over 10 years.
The National Association of Realtors also weighed in on the administration’s tax proposals above in a Sept. 7 letter to leaders of the House Ways and Means and Senate Finance Committees. The letter emphasized how these the proposals could negatively impact the health of the commercial real estate market and limit the production of much-needed affordable rental housing and result in higher rent costs.
Policymakers are also expected to address tax issues such as raising the capital gains rate, the 3.8% net investment income tax, and carried interest, as well as tax incentives for important priorities like affordable housing and energy efficiency.

Roundtable members are encouraged to contact the Ways and Means Committee directly about the Biden tax proposals. The Roundtable and its coalition partners expect this fall will be a critical time for decisions on national tax policy affecting CRE.

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