WASHINGTON, DC–Thursday morning the US House of Representatives unveiled its long-anticipated $1.51-trillion tax reform measure, a sweeping piece of legislation called the “Tax Cuts and Jobs Act.”
To cut to the chase for our readers: the bill has largely good news for the commercial real estate industry. The capital gains incentive is retained as are the current like kind exchange 1031 rules. The bill also recognizes that the cost of real estate debt is a necessary business expense and interest on debt used in a real estate trade or business would continue to be deductible.
Mortgage Interest Deduction Cap, Pass-through Entities
The industry didn’t get everything it had wanted. The bill does cap the mortgage interest deduction to $500,000 instead of offering a tax credit — a measure that the National Association of Home Builders had lobbied for, and lost.
The proposal also excludes certain professional services companies from the lower 25% tax rate for pass-through entities – indeed there are complaints that the treatment of pass-throughs in general is over-complicated.
The American Institute of Architects expressed dismay about the treatment in a prepared statement by AIA 2017 President Thomas Vonier.
“The House Ways & Means Committee proposal, as drafted, will unfairly damage the thousands of small and family-owned businesses that organize as pass-through entities,” he said. “This includes the majority of U.S. architecture firms.”
“The American Institute of Architects cannot support it as drafted.”
“More People To Work”
These issues aside, the initial take by the industry has been a good one.
“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,” Real Estate Roundtable CEO Jeff DeBoer tells GlobeSt.com.
“The bill largely reflects the key recommendations the Roundtable made in testimony before the Senate Finance Committee on Sept. 19,” he also says.
“The details are important but conceptually the bill would reduce the tax burden on all job-creating businesses — not just C corporations.”
The CRE Finance Council, in its analysis of the measure, said that it considers the aforementioned provisions as essential “to allow for continued CRE market liquidity and supply/demand balance.”
The bill also reduces the corporate tax rate to 20%, leaves the pre-tax provisions of 401(K) retirement intact and trims the number of tax brackets for individuals from seven to four — 12%, 25% and 35% percent, while keeping a top rate of 39.6% for the highest-earners.
The next steps for the measure include a markup by the Ways & Means Committee and vote on Nov. 6th.
More Lobbying Ahead
This bill is by no means a finished product though. There will be a flurry of Congressional activity up until Thanksgiving, the CRE Finance Council noted. It cautioned that “uncertainty will be the order of the day” until the bill either advances to the Senate, which is working on its own legislation that it is set to unveil next week, “or gets stymied by member opposition.”
Indeed the lobbying for measures to be added or subtracted will be fierce. The Associated General Contractors of America, to name one example in our industry, plans to advocate for the inclusion of new infrastructure funding as part of the final tax reform measure. “Tax reform provides an excellent opportunity for the president to deliver on his promise of rebuilding America’s aging and over-burdened infrastructure,” CEO Stephen E. Sandherr, said in a prepared statement. “And we will work to make sure the final proposal continues to promote public and private-sector investments in infrastructure through direct federal funding, municipal bonds (including private activity bonds) and public-private partnerships, for example.”