Copyright: Lisa S.
House Republicans released their tax reform blueprint on June 24, which
has significant implications for owners, operators and developers of
multifamily housing. NMHC and NAA are currently
evaluating the blueprint and see some undeniable positives in the form of lower
rates on business income and capital gains, some trade-offs on cost recovery
and the unacceptable elimination of the Low-Income Housing Tax Credit (LIHTC).
Although the blueprint has little chance of enactment this year, it is likely
to form the basis for legislation House Republicans hope to move in 2017. Of course, the next president, and the party controlling the Senate
following this November’s elections, will also have a critical role to play in
shaping any tax reform legislation that may ultimately be enacted.
NMHC/NAA would appreciate any reaction you may have to
the blueprint as we frame our reaction. Here’s a description of the proposals in the
blueprint that would have the most impact on the multifamily industry:
Tax Rate on Pass-Through Businesses Income: The multifamily industry is dominated by
“flow-through” entities (e.g., LLCs, partnerships, S Corporations, etc.)
instead of publicly held corporations. This means that the company’s earnings
are passed through to the partners who pay taxes on their share of the earnings
on their individual tax returns. The blueprint would tax pass-through business
income at a 25 percent rate, which is down from a current-law maximum of 39.6
percent. Notably, the blueprint would tax individual wage income at a maximum
rate of 33 percent with intermediate rates of 12 percent and 24 percent.
Capital Gains Tax Rates and Carried Interest: The blueprint
would tax capital gains, dividends, and interest at ordinary income tax rates
subject to a 50 percent exclusion. Thus, capital gains would effectively be
taxed at maximum rate of 16.5 percent, which is lower than the 20 percent
current-law maximum rate (not including the 3.8 percent net investment income
tax). The proposal does not indicate any changes to the tax treatment of
carried interest, seemingly leaving such income subject to the proposed capital
gains rules.
Depreciation, Business Interest Deductibility and Like-Kind Exchanges: The proposal
would radically overhaul the tax treatment of depreciation, business interest
deductibility and like-kind exchanges. Most notably, business investments with
the exception of land purchases, but including the purchase or construction of
a multifamily building, would be fully expensed instead of depreciated over
27.5 years. Losses could be carried forward indefinitely and would be increased
to account for inflation and return on capital. Business interest would no
longer be deductible. Like-kind exchanges are
not specifically addressed in the blueprint but would implicitly remain in the
sense that if a property were sold and another purchased, income would be
recognized on proceeds from the sale but be immediately deductible up to the cost
of the replacement property.
NMHC/NAA are analyzing this piece of the House proposal
in particular. On one hand, expensing and the resulting upfront deduction would
encourage the production of multifamily housing and help alleviate the shortage
of workforce housing. On the other, eliminating depreciation and business
interest as expenses may have the effect of promoting the churning of
multifamily real estate, particularly once a property has stabilized and the
developer is recognizing income with fewer offsetting deductions. The
elimination of a business interest deduction could also impact borrowing costs
and disproportionately impact a capital-intensive multifamily industry that
relies on debt.
Estate Tax: The proposal would repeal the estate tax. The current-law rules call for a $5.45 million ($10.9
million per couple) exemption level, a top tax rate of 40 percent and
stepped-up basis.
LIHTC: The proposal unacceptably eliminates the
LIHTC, a public/private partnership that leverages federal dollars with private
investment to: produce affordable rental
housing and stimulate new economic development in many communities. The LIHTC
has financed nearly 2.8 million apartments and served 13.3 million residents
since its inception in 1986, and its elimination would have a tremendous
negative impact on the production of affordable housing.
NMHC/NAA will remind lawmakers about the critical role
the LIHTC plays and make the case that it should be expanded rather than
repealed.
Mortgage
Interest and Charitable Deduction: The proposal eliminates nearly all itemized deductions,
including the write-off for state and local taxes. Notably, the mortgage and
charitable deductions are maintained but will be indirectly impacted because
far fewer taxpayers will itemize due to an increase in the standard
deduction.
