The Capitol

WASHINGTON, DC–Late on Friday the House of Representatives and the Senate conferees released the legislative compromise of the tax reform bill. Congress will vote on the measure this week and barring an unexpected surprise, it is expected to pass.

The top line decisions: there is a top individual tax rate of 37%, a 21% corporate tax rate, a 20% deduction for pass-throughs, as well as the repeal of the Affordable Care Act’s individual mandate.

For the CRE industry, the new tax regime for pass-throughs is significant, according to Real Estate Roundtable CEO Jeff DeBoer. He said in a prepared statement:

These pass-through entities are the backbone of the American economy, representing over 60% of all business income and creating more than 60% of all jobs in America over the past 25 years.

At the same time, it will be unclear exactly how the new pass-through tax rules will play out. There are many provisions in the bill, including with the pass-throughs, that will require the Treasury Department to draft interpretative regulations, according to DeBoer. He said:

This process will be critical in maintaining needed guardrails to prevent abuse, but also to make certain the new rules function as efficiently as possible and result in robust economic activity.

What Stays The Same

For many of the areas directly involving CRE, the current law has been maintained.

  • Current law is maintained on the deductibility of interest related to real estate trade and business debt, while other types of business debt is severely limited.
  • Current law is maintained on like kind exchanges of real property — all other types of property trades will now be taxable.
  • Current law is essentially maintained on the low income housing tax credit and private activity bonds. There are modest revisions to the historic structures tax credit but this credit is maintained as well

What Has Changed

  • The new tax regime for pass-through business entities.
  • The holding period to qualify carried interest as capital gain is increased from 1 year to 3 years. REIT shareholders will see the tax on their dividends drop from 39% to 29.6%.
  • The bill also preserved the home mortgage interest deduction but lowered the qualifying debt from current law’s $1 million to $750,000 on new home purchases.
  • The deduction allowed for state and local tax payments (SALT) now allows only a total $10,000 deduction for an individual’s state and local income, property and sales tax payments.

What Didn’t Make It Into the Bill

  • The Unrelated Business Income Tax (UBIT) provision, which was included in the House-passed version of the bill is not in the final Conference Report. Therefore state and local government pension plans will not be subject to a new UBIT tax on their gains from investing in funds, including private equity or real estate funds.