WASHINGTON, DC–Over the weekend the US Senate passed its version of the Tax Cuts and Jobs Act bill in a vote that came down to 51-49. Among many other changes to tax law the bill lowers the top corporate tax rate from 35% to 20%.
As for the commercial real estate industry, the Senate bill treats commercial real estate in a similar fashion to the House bill, give or take.
Both bills, for example, have new limitations on the ability of businesses to deduct interest on their debt — but both bills exempt from these restrictions interest on debt incurred in a “real property trade of business”
Both bills retain current law regarding IRC Section 1031 Like Kind exchange for real property transactions. All other assets no longer qualify for this treatment.
The pass through provisions of both bills allow real estate pass throughs to benefit if they otherwise qualify. Each of the bills has different qualifying formula, however. And like the House-passed bill, the Senate bill excludes certain professional services companies — including architecture firms — from tax relief.
Also, an amendment in the final package of changes advanced by Senator Orrin Hatch included a provision preserving current law for the taxation of mortgage servicing fees and income. This sleeper provision is a relief to the industry as it could have been very detrimental to mortgage capital providers.
As for carried interest, both bills extend the holding period required for gain to qualify to be taxed at the capital gain tax rate. The current law is one year and the new law would extend that to 3 years.
There are some areas in which the two bills differ. The Senate bill, for instance, eliminates the current 10% credit for pre-1936 structures and spreads the current 20% credit for certified historic structures over a five-year period. The House bill abolishes the Historic Tax Credit all together.