The Trump Administration and GOP Congressional leaders consider tax reform a top priority. While Republicans had once hoped to complete tax reform prior to the August recess, their goal now is to enact legislation by the end of the year.
On September 27, the Trump Administration and Congressional Republican leaders released the Unified Framework for Fixing Our Broken Tax Code. This document lays out key parameters for tax reform while leaving Congress’ tax-writing committees, House Ways and Means and Senate Finance, to fill in the details.
Before lawmakers can pass any tax legislation, Congressional Republicans must first approve a budget resolution so they can use the budget reconciliation process to move tax legislation forward. Simply put, reconciliation allows Congress to expedite passage of certain budgetary legislation with a simple majority vote (51 votes in the Senate, 218 votes in the House-both of which can be secured with only Republican votes). For that to happen, competing House and Senate resolutions will have to be reconciled, highlighting differences over how much of tax reform must be offset. Leaders hope to have this process completed by late October, though the timetable could slip. The House-passed budget resolution would require $203 billion in savings over 10 years, while Senators are slated to consider a resolution next week that would allow up to $1.5 trillion in deficits.
Most notably, the Unified Framework includes the following proposals of interest to the multifamily industry:
- Tax Rate on Pass-Through Income: The Unified Framework proposes a 25 percent tax rate applicable to the business income of pass-through entities (sole proprietorships, partnerships and S corporations). Notably, the framework indicates that the House and Senate will adopt rules to prevent individuals from recharacterizing wage income taxed at higher rates into business income eligible for the 25 percent rate. For example, one option would be to only allow 30 percent of business income to qualify for the 25 percent rate while the remaining 70 percent would be taxed as ordinary income. NMHC/NAA are working on securing a more appropriate treatment for business income attributable to capital-intensive multifamily real estate.
- Interest Deductibility: The Unified Framework curtails interest deductibility for C-corporations, but notes that the tax-writing committees will consider the appropriate treatment of interest paid by non-corporate taxpayers, such as pass-throughs. NMHC/NAA are working to see that pass-through multifamily businesses continue to be able to deduct 100 percent of business interest as an ordinary and necessary expense.
- Depreciation: The Unified Framework provides for immediate expensing of capital investments for at least five years, although it does specifically exclude structures. NMHC/NAA are working to retain the 27.5-year depreciation period for multifamily buildings and make the case that the true depreciation period for our industry should be 19 years.
- Like-Kind Exchanges: The Unified Framework is silent on the treatment of like-kind exchanges. It notes that certain credits and deductions will be eliminated and others modernized. NMHC/NAA are working to maintain like-kind exchanges. These, however, could be “modernized” and limited in scope. For example, it is possible that like-kind exchanges for multifamily assets may be limited to multifamily assets as opposed to other commercial real estate assets as is permitted under current law.
- Carried Interest: The Unified Framework is silent on the treatment of carried interest. It notes that certain credits and deductions will be eliminated and others modernized. NMHC/NAA are working to maintain the current-law capital gains treatment of carried interest.
- Low-Income Housing Tax Credit: The Unified Framework identifies the Low-Income Housing Tax Credit as one of two business tax credits to retain (the Research and Development Tax Credit is the second). NMHC/NAA are extremely pleased by this development but continue to remind lawmakers that the value of LIHTC must be kept whole as corporate tax rates are reduced.
- Tax Rates on Individual Income: The Unified Framework collapses today’s seven tax brackets into three of 12 percent, 25 percent, and 35 percent with a possibility of a fourth bracket for the highest income Americans.
- Alternative Minimum Tax (AMT): The Unified Framework eliminates the individual AMT.
- Corporate Tax Rate: The Unified Framework sets the top corporate tax rate at 20 percent.
NMHC/NAA’s original article explaining the framework can be found here.
- NMHC/NAA Request Taxpayers Get Full Value of Pass-Through Deduction
- Apartment Industry Reminds Ways and Means Committee of Tax Reform Regulatory Priorities
- Apartment Industry Statement on Tax Reform to House Ways and Means Committee
- Apartment Industry Calls on Congress to Clarify Tax Reform Rules
- Apartment Industry Statement for the Record Regarding the Senate Finance Committee’s Hearing, Early Impressions of the New Tax Law