Copyright: Ken Felepchuk
The Trump Administration released its principles for tax reform on April 26 calling for “the biggest tax cut and the largest tax reform in the history of our country.” The plan now joins the House Republican Tax Blueprint released last June on the table for consideration.
Provisions in the Trump plan are substantially different from the House Republican Tax Blueprint. Unlike the House Republican Tax Blueprint, the Trump plan does not appear to provide for the immediate expensing of buildings and other property held for investment or deny the full deductibility of business interest. The Trump plan also cuts maximum flow-through tax rates to 15 percent instead of the House Republican plan’s 25 percent rate. Taxes on investment income would be taxed at 20 percent as opposed to the 16.5 percent rates contemplated by House Republicans. Below is a comparison of current law, the House Republican Blueprint and the Trump plan:
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Comparison of Tax Plans on the Table |
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Provision |
Current Law |
House Blueprint |
Trump Proposal |
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Business Tax Rates |
Flow-through entity: Maximum rate of 39.6% Corporation: Maximum Rate of 35% |
Flow-through entity: Maximum rate of 25% Corporation: Maximum Rate of 20% |
15% rate for all business |
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Individual Rates |
Maximum Rate of 39.6% |
Maximum Rate of 33% |
Maximum Rate of 35% |
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Investment Income Rate |
Maximum Rate of 20%, plus 3.8% tax on net investment income |
Maximum Rate of 16.5% |
Maximum Rate of 20% |
|
Estate Tax |
$5.49 million exclusion, 40% rate and stepped-up basis for inherited assets |
Repealed |
Repealed |
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Tax Deductions |
Many deductions |
Most eliminated except for mortgage interest and charitable giving. Standard deduction doubled. |
Most eliminated except for mortgage interest and charitable giving. Standard deduction doubled. |
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Depreciation of Multifamily Buildings |
27.5 years |
Expensed in year of purchase or development |
No proposal to change or retain current law |
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Business Interest Deductibility |
Fully deductible |
Deduction eliminated |
No proposal to change or retain current law |
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Low-Income Housing Tax Credit |
Included in current law |
Blueprint silent but Ways and Means agreement to retain incentive |
No proposal to change or retain current law |
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Like-Kind Exchanges |
Included in current law |
No proposal to change or retain current law |
No proposal to change or retain current law |
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Carried Interest |
Taxed at capital gains rates |
No proposal to change or retain current law |
No proposal to change or retain current law |
The key elements of the Trump tax plan that would impact apartment owners, developers and managers are outlined below:
- Reduce Business Tax Rates: The tax rate applicable to both the flow-through entities that dominate the multifamily industry (e.g., LLCs, Partnerships and S Corps) and corporations would be reduced to 15 percent. Currently, individuals receiving income from a flow-through entity face a maximum tax rate of 39.6 percent. The Administration indicated it would need to include rules on flow-through entities to prevent individuals from claiming wage income taxed at higher rates as business income qualifying for the 15 percent rate.
- Cut Individual Tax Rates: Today’s seven brackets, ranging from 10 percent to 39.6 percent, would be consolidated into three new brackets of 10 percent, 25 percent and 35 percent.
- Eliminate the Estate Tax: The Trump plan proposes to eradicate the estate tax. Current law exempts the first $5.49 million from the tax, imposes a top tax rate of 40 percent and retains stepped-up basis rules. It is unclear if stepped-up basis would be retained as part of repeal.
- Maintain Capital Gains Tax Rates: The plan proposes to retain a 20 percent capital gains tax rate. However, it would repeal the 3.8 percent net investment income tax enacted as part of the Affordable Care Act that targeted passive investment income.
- Repeal Business “Loopholes”: Although Administration officials have indicated that faster economic growth would pay for some of the tax rate reductions, the White House is also proposing to “eliminate tax breaks for special interests.” NMHC/NAA will make the case that possible targeted provisions, such as like-kind exchanges and carried interest, are critical provisions that promote needed housing investment and not tax loopholes.
- Double Standard Deduction and Repeal Most Individual Itemized Deductions: Under the Administration plan, only the mortgage interest and charitable giving itemized deductions would be preserved; the state and local tax deduction would be eliminated. At the same time, the standard deduction would be doubled, which would reduce the number of households who would take those deductions.
The timing for tax reform remains fluid. The original goal of reform by the August recess has been changed to be reform by the end of this year. The Trump Administration said it plans to meet with House and Senate tax writers throughout May to develop a plan that Congress can approve.
House and Senate leadership issued joint statement saying, in part, “The principles outlined by the Trump Administration today will serve as critical guideposts for Congress and the Administration as we work together to overhaul the American tax system and ensure middle-class families and job creators are better positioned for the 21st century economy.”
In the weeks ahead, the multifamily industry will continue to work with the Trump Administration and Congress to advocate for tax reform that promotes economic growth and investment in rental housing without unfairly burdening apartment owners and renters relative to other asset classes.
NMHC/NAA have also engaged Capitol Tax Partners, one of Washington’s premier tax lobbying firms, to compliment the NMHC staff efforts. Capitol Tax Partners is a unique firm in that it not only has significant relationships among policymakers, but firm principals also have deep knowledge about the tax code. Specifically, we will advocate for a bill that:
- Protects flow-through entities;
- Preserves the deduction for business interest;
- Retains like-kind exchanges;
- Provides for sensible depreciation rules;
- Continues to tax carried interest at capital gains rates; and
- Maintains the Low-Income Housing Tax Credit.
Tax reform will be an important topic at NMHC’s Spring Board of Director’s meeting scheduled for May 16-18 in New York. A priority panel will feature representatives from Capitol Tax Partners and PwC who will present their analysis on how the apartment industry would fare under the proposals being considered, namely a tax system that provides for the full expensing of real estate but denies the deductibility of business interest. This can’t miss session is your opportunity to hear first-hand about the current state of play in Washington on tax reform from people in the know.