Copyright: EtiAmmos
By Matthew Berger, VP of Tax, Student Housing
Matthew M. Berger is Vice President of Tax and Vice President of Student Housing. In his tax role, Matthew represents the interests of the multifamily industry before Congress and federal agencies on tax issues.
On March 11, President Biden unveiled his Fiscal Year 2025 Budget proposal that includes several significant tax increases that would impact the multifamily industry. Generally mirroring previous Biden Administration budgets, these proposals would increase tax rates on ordinary income and capital gains, as well as net investment income, while limiting deferral from like-kind exchanges and taxing carried interest as ordinary income.
While these tax increases face long odds to enactment in a Republican-controlled House of Representatives, they nonetheless reflect the Administration’s views on tax policy and, should President Biden win reelection, will be in play in 2025 when major provisions of the Tax Cuts and Jobs Act (TCJA) expire.
NMHC is already working to educate members of Congress about the key role expiring TCJA provisions play in the multifamily industry, including those providing for lower marginal income tax rates, the 20-percent deduction for qualified pass-through income and REIT dividends, and an increased estate tax exemption level.
At the same time, NMHC is urging the Senate to pass the Tax Relief for American Families and Workers Act of 2024 that would expand and enhance the Low-Income Housing Tax Credit, as well as suspend tax increases on business investment pertaining to bonus depreciation and the deductibility of business interest.
Use the drop-down feature below to navigate specific tax provisions that would affect the multifamily industry in President Biden’s Fiscal Year 2025 Budget proposal:
The Budget would increase the top statutory marginal income tax rate to 39.6 percent from 37 percent effective for taxable years beginning after 2023. The increased tax rates would take effect for single filers earning over $400,000 and married filers earning over $450,000. Under current law, today’s 37 percent rate reverts to 39.6 percent beginning in 2026 following the expiration of TJCA. The 20 percent qualified business income deduction, which effectively reduces today’s top 37 percent rate to 29.6 percent, expires at the end of 2025 as well. It should be noted that today’s top 37 percent tax rate does not apply until a single filer earns over $609,350 and a married filer earns over $731,200 (and both thresholds will revert to significantly lower pre-TCJA levels indexed for inflation starting in 2026).
The Budget proposes to tax capital gains and qualified dividends at ordinary income tax rates for taxpayers earning over $1 million. The proposal would be effective for gains recognized and dividends received on or after the date of enactment. The $1 million threshold would also be indexed for inflation after 2024.
Combined with the Administration’s proposals to expand the scope and increase the rate of the net investment income tax (see below), the proposal would raise the top tax rate on long-term capital gains and qualified dividends to 44.6 percent from today’s rate of 23.8 percent (20 percent statutory rate plus 3.8 percent net investment income tax rate).
In addition, the proposal would impose a tax on unrealized capital gains at death as well as certain transfers of appreciated property by gift. Taxpayers would be allowed to exclude $5 million in assets ($10 million per couple) in addition to $250,000 (single taxpayers) / $500,000 (married taxpayers) of the value of a principal residence. A 15-year fixed payment plan would be available with respect to assets other than liquid assets, and taxation of unrealized gains on family-owned businesses could be deferred until the business is sold or no longer family operated.
The Budget proposes to tax carried interest as ordinary income as opposed to capital gains if a taxpayer’s income exceeds $400,000. The proposal would be effective for taxable years beginning after 2024.
The Budget proposes to expand the current-law net investment income tax to include net investment income (i.e., capital gains, interest, dividends, annuities, royalties, and rents) earned in the ordinary course of a trade or business, which would be phased in for taxpayers earning over $400,000 and fully phased-in for taxpayers earning over $500,000. The expanded tax would not apply to any wages on which SECA is currently imposed. The proposal would be effective retroactively for taxable years beginning after 2023.
Additionally, effective for taxable years beginning after 2023, the current-law 3.8 percent net investment income tax rate would increase to 5 percent for taxpayers earning over $400,000.
Finally, with regard to current law’s additional 0.9 percent Medicare tax applicable to employment earnings over $200,000 for single filers and $250,000 for married filers, the Budget proposes to impose an additional 1.2 percent tax on employment earnings over $400,000. This proposal would be effective retroactively for taxable years beginning after 2023 and raise the marginal Medicare tax rate to 5 percent. The threshold for this portion of the proposal would be indexed for inflation.
The Budget proposes to limit the deferral of taxable gain from a like-kind exchange to $500,000 for single taxpayers and $1 million for married taxpayers. The proposal would be effective for exchanges completed in taxable years beginning after 2024.
The Budget proposes to make permanent a provision limiting excess business losses that was otherwise set to expire at the end of 2028. Under current law, a non-corporate taxpayer is considered to have an excess business loss if its total business deductions exceed business income plus $305,000 for single filers and $610,000 for joint filers. Additionally, while current law allows excess businesses losses to be treated as a net operating loss, the proposal would modify this treatment and treat losses carried forward to future years as current-year businesses losses.
The Budget proposes to impose ordinary income taxes on recaptured depreciation (as opposed to the current-law 25 percent rate) for the recapture of depreciation deductions taken in taxable years beginning after 2024. The proposal would apply to taxpayers with incomes of $400,000 or more.
As described in the Treasury Green Book, “the proposal would reduce the ability of related parties to use a partnership to shift partnership basis among themselves for the purpose of creating advantageous tax results with no meaningful economic consequences. In the case of a distribution of partnership property that results in a step-up of the basis of the partnership’s non-distributed property, the proposal would apply a matching rule that would prohibit any partner in the distributing partnership that is related to the distributee-partner from benefitting from the partnership’s basis step-up until the distributee-partner disposes of the distributed property in a fully taxable transaction.”
- Increasing annual credit allocations;
- Reducing the bond financing threshold to 25 percent from 50 percent to receive the full amount of 4 percent LIHTCs;
- Repealing the qualified contract provision effective as the date of the enactment. However, that provision would not apply if before 2025: (1) a building received a housing credit; or (2) “in the case of a building some portion of which is financed with PABs [private activity bonds] subject to volume cap, the building received a determination that the LIHTCs received on account of the PAB financing would be necessary for the building’s financial feasibility and continued viability, and that an allocation of HCDAs [housing credit dollar amounts] would have been permissible in the absence of PAB financing;” and
- Repealing the right of first refusal and replace it with an option safe harbor, effective for agreements entered into, or amended, after the date of enactment. The Budget notes that “The Administration will work with Congress to develop an approach appropriate for existing agreements.”
The Budget proposes to expand and enhance the LIHTC by:
