Wednesday, November 8, 2017

Tax Reform Bill Draws Cautious Support from CRE Industry Leaders

CRE industry leaders who worried that the largest rewrite of the U.S. tax code in more than three decades would eliminate like-kind 1031 exchange transactions or curtail the ability of businesses to write off interest and debt expenses breathed a collective sigh of relief last week after House Republican leaders outlined the major components of their long-awaited bill.

The Tax Cuts and Jobs Act (H.R. 1), released last week by the U.S. House of Representatives Ways and Means Committee, also retains existing rules for writing off depreciation of commercial property, while reducing the tax burden on all businesses.

Real Estate Roundtable President and CEO Jeffrey DeBoer, who led efforts to keep those provisions, said the proposed bill, by reducing barriers to private-sector capital formation and business investment, "will boost economic demand and job growth."

"If the final bill is similar to the one introduced today, our industry will put more people to work modernizing and improving existing properties - office buildings, shopping centers, apartments, industrial properties - to meet the changing and growing needs of American businesses and consumers," DeBoer said in a statement.

The proposal reduces the corporate tax rate from 35% to 20% for tax years beginning after 2017 and repeals the corporate alternative minimum tax.

The legislation provides for a special maximum 25% tax rate on ordinary income that would apply to the "qualified business income" of individuals engaged in business activities through sole proprietorships, tax partnerships and S corporations. Business income not qualifying as such would remain subject to the normal ordinary income tax rate.

Current law generally treats those entities as "pass-through" entities subject to tax at the owner or shareholder level. Net income earned by an individual owner or shareholder of one of these entities is reported on the individuals income tax return and is subject to ordinary income tax rates up to the top individual marginal rate of 39.6%.

In a bulletin, the CRE Finance Council (CREFC) described the retention of interest deduction, 1031 exchanges and existing cost recovery and depreciation rules as "major steps in the advocacy effort to allow for continued CRE market liquidity and supply/demand balance."

While CREFC remains skeptical that House leadership can meet its aggressive goal of getting the bill to the Senate before the Thanksgiving holiday due to its size and complexity, the group expects a flurry of Congressional activity up until the holiday.

"We caution that uncertainty will be the order of the day until the bill either advances to the Senate (which is working on its own legislation) or gets stymied by member opposition," the group said.

The U.S. apartment industry's main lobbying groups, the National Multifamily Housing Council (NMHC) and National Apartment Association (NAA), said that while they are still reviewing the legislation, the proposal as written "looks to encourage economic growth and job creation."

"Critically, the Tax Cuts and Jobs Act would preserve interest deductibility, like-kind exchanges and other provisions important to the apartment industry," the groups said in a joint statement.

NMHC/NAA said it would work with lawmakers to safeguard those provisions and others, including the capital gains treatment of carried interest and the Low-Income Housing Tax Credit (LIHTC), during the "long process ahead before tax reform becomes law."

While capital markets, CRE and small-business interests generally lauded the proposal, the residential real estate and mortgage industry cited serious concerns about how the provisions will impact U.S. housing markets, including the production of affordable housing.

"We believe that the proposed changes to the mortgage interest deduction, deductibility of state and local real estate taxes and the exemption for capital gains treatment when families sell their principal residence would have a negative impact on the housing market and potentially the national economy as a whole," said David H. Stevens, president and CEO of the Mortgage Bankers Association (MBA). "We are also concerned about the potential impact of certain provisions on the production of affordable housing, which is vital."

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