House Ways and Means Committee Chairman Dave Camp (R-MI) unveiled a sweeping tax reform proposal
this week to little or no fanfare on Capitol Hill. Camp emphasized
that taxpayers would receive lower tax rates along with a simpler,
fairer code that would boost the economy. But Republicans and Democrats
alike are saying that the proposal targets several popular tax breaks in a critical election year, and Speaker of the House John Boehner (R-OH) is setting low expectations for any quick action on the plan.
Both the individual and corporate aspects of the proposal are being carefully analyzed by lawmakers and pundits in the press. For the multifamily industry, an area that could be of significant concern is that the proposal would extend to 40 years, from 27.5 years, the depreciation period for apartment buildings placed in service beginning in 2017. In a further blow to real estate, depreciation recapture would be taxed at ordinary income rates of up to 35 percent, as opposed to today’s 25 percent rate, for sales after 2014.
The multifamily industry can, however, also claim significant victories. Most notably, that the proposal retains capital gains tax treatment for a carried interest applicable to multifamily real estate. The proposal also maintains the full deductibility of business, interest and state and local taxes, resulting from business activities. In addition, the Low-Income Housing Tax Credit is preserved, even though it had been under fire, but with a longer recovery period and without the current four percent credit. And finally, the current-law estate tax, which allows for a $5.34 million ($10.68 million per couple) exclusion, 40 percent top tax rate, and stepped-up basis for inherited assets, is left unchanged in the proposal.
Although the House and Senate are not expected to advance comprehensive legislation this year, Camp’s tax reform proposal is likely to be the subject of Ways and Means Committee hearings. The bill will also certainly be a starting point for any future tax reform discussions beyond this year and NMHC/NAA will continue to remain actively engaged.
Camp’s Tax Reform Plan: An In-Depth NMHC Analysis
Individual Tax Rates: The top marginal tax rate for individuals and flow-through entities (e.g., LLCs, partnerships, and S Corporations), which dominate the multifamily industry, would fall to 35 percent from today’s 39.6 percent. The 35 percent bracket would apply to married couples earning over $450,000 and single filers earning over $400,000.
Notably, income attributable to construction of real property as part of the active conduct of a construction trade or business would be subject to a maximum tax rate of 25 percent. Finally, itemized deductions (except for charitable contributions), the value of employer-provided health benefits, and contributions to employer-provided retirement accounts could only be claimed against the 25 percent bracket for taxpayers in the 35 percent bracket.
Capital Gains and Dividends: Capital gains and
dividends would be taxed at ordinary income rates with a 40 percent
exclusion, meaning that the top effective tax rate applicable to such
income would rise to 21 percent from today’s 20 percent. Additionally,
the 3.8 percent net investment income tax remains in place, which could
push the total capital gains and dividends tax bite to 24.8 percent for
Carried Interest: In a significant victory, the Camp proposal exempts real estate from a proposal that would tax certain partnership interests at ordinary income tax rates as opposed to current-law capital gains tax rates.
Business Interest Deduction: The Camp proposal maintains the full deductibility of business interest that the apartment industry advocated for strongly.
State and Local Taxes: State and local income, property, and sales taxes would only be deductible to the extent they are paid or accrued in carrying on a trade or business, or producing income. Employees, for example, would no longer be allowed to claim state and local income taxes as an itemized deduction, and homeowners would be unable to deduct state and local property taxes.
Depreciation: The Camp proposal would increase to 40 years, from 27.5 years, the depreciation period of multifamily buildings placed in service beginning in 2017. In an additional blow to real estate, depreciation recapture would be taxed at ordinary income rates of up to 35 percent as opposed to today’s 25 percent rate for sales after 2014.
Like-Kind Exchanges: Like-kind exchanges would be repealed for transfers after 2014. However, a like-kind exchange would be permitted if a written binding contract is entered into on, or before, December 31, 2014, and the exchange under the contract is completed before January 1, 2017.
Estate Tax: In a win for the apartment industry, the legislation does not modify current estate tax law that allows for a $5.34 million ($10.68 million per couple) exclusion, 40 percent top tax rate, and stepped-up basis for inherited assets.
Low-Income Housing Tax Credit (LIHTC): In a win for the industry, the Camp proposal retains the LIHTC. However, the proposal would extend the credit period to 15 years from 10 years, repeal the 4 percent credit, and eliminate tax-exempt private activity bonds. Additionally, state and local housing authorities would allocate qualified basis as opposed to credit amounts.
Net Earnings from Self Employment: The Camp draft seeks to capture additional self-employment taxes and conform rules that currently differ among flow-through entities (e.g., S Corporations and partnerships). Specifically, the measure would apply payroll tax liability to 70 percent of a partner or shareholder’s compensation and distributive share of an entity’s income in which the partner or shareholder materially participates. None of the earnings of non-materially-participating partners and S corporation shareholders would be subject to payroll taxes.
Energy Efficiency Incentives: The deduction for energy efficient commercial buildings and the tax credit for new energy efficient homes, which both expired at the end of 2013 and may be renewed as part of a forthcoming tax extenders bill, would lapse permanently.
- Senate Finance Committee Task Forces Focus on Expired Tax Provisions
- Apartment Industry Calls for Renewal of Tax Provisions Designed to Spur Energy Efficiency
- NMHC and NAA Signal Support for the Affordable Housing Credit Improvement Act
- ACTION Coalition Letter - June 2019
- NMHC and NAA 179D Letter to Senate Finance Committee Cost Recovery Task Force - June 2019