NMHC/NAA submitted a statement to the Senate Finance Committee calling on Congress to clarify provisions in last year’s tax reform bill pertaining to issues such as depreciation and the new 20 percent tax deduction for pass-throughs. The statement follows a similar letter to Treasury Secretary Steven Mnuchin sent on March 15.
The apartment industry’s statement requests that Congress either pass technical corrections legislation or that the Trump administration swiftly issue administrative guidance to address an unintended consequence from last year’s tax reform legislation that impacts the depreciation period of existing apartment properties. The law was intended to allow firms to choose whether they would like to deduct business interest, but if they were to do so, they must depreciate the property for 30 years instead of 27.5 years. However, due to a mistake in the legislative language, the law can be read to only apply to properties placed in service after 2017.
Because of the drafting error in the statute, existing buildings that opt to deduct business interest would have to be depreciated over 40 years. NMHC/NAA continue to make the case to policymakers that Congress never intended a 40-year depreciation period.
Additionally, NMHC/NAA have asked the Treasury Department to make several clarifications with respect to the new 20 percent deduction for pass-through entities. Such guidance is vital to ensuring multifamily firms can take full advantage of the incentive. Specifically, the industry is calling on Treasury to:
- Enable individuals to aggregate qualified business activities for purposes of calculating the deduction at the partner level. This would help ensure entities can focus on their business activities rather than engaging in costly restructuring efforts.
- Clarify that property acquired pursuant to a like-kind exchange will not be disadvantaged in calculating the 20 percent deduction.
- Allow REIT dividends held through mutual funds to fully qualify for the 20 percent deduction. Approximately half of REIT shares are held in mutual fund portfolios.
The multifamily industry also asked the Treasury Department to clarify that a taxpayer may use any reasonable allocation method to deduct business interest attributable to a real property trade or business and that debt to capitalize such enterprises is fully deductible. Under the new law, multifamily firms may elect to retain the full deductibility of business interest and NMHC/NAA are working to ensure there are no disruptions.
Finally, NMHC/NAA provided several recommendations with respect to Opportunity Zones, a new tax incentive designed to spur investment in distressed area. By providing for the deferral of capital gains invested in Opportunity Funds and eliminating tax on certain gains realized from Opportunity Fund investments, the programs provide a strong incentive to drive considerable investment in multifamily housing.
NMHC/NAA asked that lawmakers work with the Treasury Department to make the Opportunity Zones program as effective as possible and that lawmakers encourage the Treasury Department to ensure:
- Multifamily housing is a qualified investment for Opportunity Funds.
- Multifamily properties receiving other tax benefits, including Low-Income Housing Tax Credits, Historic Tax Credits and New Markets Tax Credits, are qualified investments for Opportunity Funds.
- Properties of all sizes be able to receive Opportunity Fund financing.
More information on the Opportunity Zone program can be found here.
- Real Estate Industry Urges Congress to Correct Depreciation Oversight in Tax Cuts and Jobs Act Legislation
- Real Estate Coalition ADS Tax Reform Letter to House Ways and Means Committee
- Senate Finance Committee Task Forces Focus on Expired Tax Provisions
- NMHC and NAA Comment on Ways to Maximize the Positive Impact of Opportunity Zones
- NMHC and NAA HUD Opportunity Zones Comment Letter - June 2019