On March 29, President Biden released his Fiscal Year 2023 budget proposal. This year’s proposal includes several provisions key to our industry—including a 19 percent HUD budget increase and provisions that would once again target ordinary income tax rates, capital gains tax rates, the taxation of unrealized capital gains at death, like-kind exchanges and carried interest.
What This Proposal Means for the Industry
NMHC appreciates the Administration’s focus on additional HUD funding that would support our shared housing affordability goals. However, we remain concerned about the harmful impacts of the proposed tax provisions. Congress rightly did not enact these tax proposals last year when they were considered as part of the infrastructure package, and doing so now would only reduce funds available to develop and manage real estate, an enterprise that often includes significant risk.
The proposal is largely viewed as a messaging document that is intended to layout the Administration’s agenda for the year ahead—whether or not included provisions are eventually enacted remains to be seen. However, NMHC remains highly engaged to deter policymakers from implementing policies that threaten the stability of our industry and hinder much-needed development.
Use the drop-down feature below to learn more about key provisions impactful to our industry.
The HUD budget includes $35 billion for the Housing Supply Fund to provide affordable housing grants to state housing finance agencies.
Biden is calling for $32.1 billion in additional voucher funding to provide support to 200,000 additional households in need.
The budget would increase the top statutory marginal income tax rate to 39.6 percent from 37 percent effective for taxable years beginning after December 31, 2022. Absent legislation, today’s 37 percent rate reverts to 39.6 percent beginning in 2026 under current law.
The budget proposes to tax capital gains at ordinary income tax rates for taxpayers earning over $1 million. This would mean that today’s 20 percent top statutory rate would rise to 39.6 percent for impacted taxpayers not including the application of the 3.8 percent net investment income tax.
In addition, the proposal would impose a tax on unrealized capital gains at death. Taxpayers would be allowed to exclude $5 million in assets ($10 million per couple) in addition to $250,000 (single taxpayers) / $500,000 (married taxpayers) of the value of a principal residence. A 15-year fixed payment plan would be available with respect to assets other than liquid assets and taxation of unrealized gains on family-owned businesses could be deferred until the business is sold or no longer family operated.
The budget proposes to tax carried interest at ordinary income tax rates as opposed to capital gains tax rates if a taxpayer’s income exceeds $400,000.
- Enable taxpayers to pay their first-year liability in nine annual installments. Liabilities in subsequent years could be paid in five annual installments. Illiquid taxpayers (i.e., taxpayers with tradeable assets that comprise less than 20 percent of wealth) could elect to defer tax on unrealized gains of tradeable assets subject to an interest charge of up to 10 percent.
- Payments would be creditable against the taxation of realized capital gains.
- Refunds would be available in the case that prepayments of the tax exceed the long-term capital gains rate times the taxpayer’s unrealized gains.
- Taxpayers with wealth exceeding $100 million would have to make annual disclosures to the Internal Revenue Service regarding their assets. Tradeable assets (e.g., publicly traded stock) would be valued end of year. Non-tradeable assets would be “valued using the greater of the original or adjusted cost basis, the last valuation event from investment, borrowing, or financial statements, or other methods approved by the Secretary.” Taxpayers would not have to obtain a valuation each year and “would instead increase by a conservative floating annual return (the five-year Treasury rate plus two percentage points) in between valuations.”
The budget would impose a 20 percent tax on total income, including unrealized capital gains, for taxpayers with net assets exceeding $100 million. Key features of the proposal would:
The budget proposes to limit the deferral of taxable gain from a like-kind exchange to $500,000 for single taxpayers and $1 million for married taxpayers.
The budget proposes to impose ordinary income taxes on recaptured depreciation (as opposed to the current-law 25 percent rate) for the recapture of depreciation deductions taken in taxable years beginning after December 31, 2022. The proposal would apply to taxpayers with incomes of $400,000 or more.
As described in the Treasury Green Book, “the proposal would reduce the ability of related parties to use a partnership to shift partnership basis among themselves. In the case of a distribution of partnership property that results in a step-up of the basis of the partnership’s non-distributed property, the proposal would apply a matching rule that would prohibit any partner in the distributing partnership that is related to the distributee-partner from benefitting from the partnership’s basis step-up until the distributee-partner disposes of the distributed property in a fully taxable transaction.”
The budget would enable housing finance agencies to provide nongeographic basis boosts to private activity bond-financed Low-Income Housing Tax Credit projects.
- Surtax on Ordinary Income and Capital Gains: Impose a 5 percent surtax on ordinary income and capital gains of taxpayers earning over $10 million in modified adjusted gross income (AGI) (i.e., adjusted gross income less investment interest expense) and an additional 3 percent surtax on taxpayers earning over $25 million in modified AGI.
- Application of Net Investment Income Tax on Active Income: Expand the current-law 3.8 percent net investment income tax to include net investment income (i.e., capital gains, interest, dividends, annuities, royalties, and rents) earned in the ordinary course of a trade or business by single filers earning over $400,000 and married couples earning over $500,000. It would not apply to any wages on which FICA is currently imposed.
- Treatment of Business Losses: Make permanent a provision limiting excess business losses that was otherwise set to expire at the end of 2026. Under current law, a non-corporate taxpayer is considered to have an excess business loss if their total business deductions exceed business income plus $250,000 for single filers and $500,000 for joint filers. Additionally, while current law allows excess businesses losses to be treated as a net operating loss, the proposal would modify this treatment and not allow losses to offset wages or portfolio income in future years. Losses, however, could be carried forward.
Notably, the President’s budget does not include a description of revenue proposals the House passed last November as part of the Build Back Better Act. Instead, these are assumed in the budget baseline. Among other provisions, these proposals would: