The Treasury Department and the Internal Revenue Service (IRS) issued final regulations on January 18 to implement the new 20 percent tax deduction for qualifying pass-through businesses enacted as part of the Tax Cuts and Jobs Act.
The final regulations address several of the issues NMHC/NAA identified in a comment letter on the proposed regulations. Effective through 2025, the deduction reduces the top tax rate applicable to qualifying multifamily income to 29.6 percent from 37 percent.
In a victory for the apartment industry, the final regulations enable taxpayers to recognize the full value of like-kind exchanges and other types of transactions commonly used in the real estate industry. The proposed regulations reduced the unadjusted basis following transactions and potentially limited a taxpayer’s pass-through deduction. The final regulations allow individuals to retain the basis of a relinquished property or contributed assets, as the case may be. Examples of pass-through businesses are sole proprietorships, partnerships, S corporations, estates and trusts.
In an additional benefit to the multifamily industry, the Treasury Department and IRS issued proposed regulations that clarified that REIT dividends held as part of a mutual fund (as opposed to those derived from directly held REIT stock) qualify for the 20 percent deduction. NMHC/NAA requested such treatment in our comment letter.
While the Treasury Department and IRS significantly improved the proposed regulations, the government declined to adopt the multifamily industry’s request to make it easier to aggregate real estate activities conducted in multiple separate partnerships into a single entity for purposes of calculating the pass-through deduction. Unfortunately, the rules will, in some cases, make it challenging for real estate activities to be aggregated.
Overall, the final regulations are favorable to the multifamily industry.
For more information on pass through reductions, please read our FAQ document on pass through deductions.
- Bipartisan Multifamily Depreciation Bill Introduced
- IRS Delays Implementation of New Partnership Tax Forms
- Real Estate Industry Multifamily Depreciation Parity Act Letter to House and Senate – December 2019
- Real Estate Group Letter to IRS Regarding New Partnership Tax Forms – November 2019
- Real Estate Industry Urges Congress to Correct Depreciation Oversight in Tax Cuts and Jobs Act Legislation