Real estate industry professionals and investors should consider the “Unified Framework for Fixing Our Broken Tax Code” (the Framework), a new tax reform proposal released on September 27, 2017, by the Administration and Congressional Republicans. The Framework states that it is intended to simplify the tax code and lower rates. While the document lacks specifics, it does outline a way forward for tax reform, and touches on issues of significance to the real estate industry.
Of note to all taxpayers, the Framework contains proposals to set individual tax rates at 12%, 25%, and 35% — with allowance that “an additional top rate may apply to the highest-income taxpayers.” The Framework also includes proposals to repeal the alternative minimum tax (AMT) for individuals and corporations, as well as estate and generation-skipping taxes. Apart from the low-income housing and the research tax credits, the Framework calls for the elimination of most other tax credits. Most itemized deductions would be eliminated under the Framework, other than the deductions for home mortgage interest and charitable contributions.
Under the Framework, businesses could see a 25% rate for flow-through entities (e.g., partnerships and S corporations) and 20% rate for corporations. Additionally, the Framework calls for immediate expensing of investments in depreciable assets placed in service after September 27, 2017, excluding structures, for five years. Furthermore, the deduction for net interest expense could be limited when “incurred by C corporations” but is not otherwise extended to other entities.
Implications for the Real Estate Industry
While the Framework did not provide enough specific details, there are some noteworthy highlights for the real estate industry, including:
— The Framework did not mention rate reduction for capital gains and dividends. Whether such rate reductions will be part of the equation as the legislative process moves ahead bears watching.
— The narrowing of the immediate expensing proposal under the Framework is of particular import since it now excludes “structures” as well as land. Previous tax reform proposals had only excluded land from their immediate expensing proposal and such proposals did not have a defined term (e.g., five years).
— The deduction for net interest expense under the Framework would not be completely eliminated as it was in previous tax reform proposals. Instead, the deduction for net interest expense would be limited and the proposed limitation would be initially targeted towards corporations (with non-corporate taxpayers a secondary consideration). Using leverage and deducting interest expense are particularly important for the real estate industry, meaning a close eye must be kept on how this proposal evolves.
— The elimination of the state and local tax deduction (including the property tax deduction) for individual taxpayers will likely affect high-tax jurisdictions and homeowners’ disproportionately.
— Not mentioned by the Framework were carried interest reform, the potential repeal of the like-kind exchange regime under Section 1031 or the potential repeal of FIRPTA. Each of the foregoing has either appeared in a previous tax reform proposal or been the subject of a significant lobbying effort around tax reform. Whether the Framework’s silence on each of these topics indicates their continued vitality as part of the tax reform discussion remains to be seen.
The Framework is intended to be a guide for both the House Ways and Means Committee and Senate Finance Committee as they craft specific tax reform legislation. Accordingly, taxpayers of all types should take this opportunity to speak with their tax advisors about planning opportunities and to learn more about how the Framework may impact their specific tax situation. To learn more about the recently released Framework, please contact your Caroprese tax expert.