Posted on December 8, 2017
NAIOP's legislative team is committed to keeping you informed throughout this historic tax reform legislative process with progress updates and what the legislation means for the commercial real estate development industry.
The Senate has taken a significant step toward achieving comprehensive tax reform by passing its version of the Tax Cuts and Jobs Act. This week, the House and Senate will meet in conference to iron out the differences between the two versions.
Both the Senate and House versions of the bill include matters important to our industry, including:
- Maintaining Section 1031 like-kind exchanges for real estate.
- Maintaining the deductibility of interest on debt for those involved in real property trades or businesses, including CRE development.
- Preserving capital gains tax treatment of carried interest for real estate practitioners, but requiring that assets be held for three years or more. Senate amendments that would have eliminated capital gains treatment for carried interests completely were defeated.
- Reducing corporate tax rates to 20 percent from the current 35 percent, not taking effect until 2019 in the Senate proposal.
- Limiting state and local taxes deductions to property tax and capping it at $10,000; the original Senate proposal would have eliminated it completely.
- Doubling the estate and gift tax exemption levels (with inflation adjustments) from the current $5.49 million for individuals or $10.98 million for married couples. The Senate version would not completely repeal the estate tax; the House version phases it out entirely by 2024.
While the Senate amended its original version to bring it more in line with provisions included in the House bill, several important differences remain, including:
- Taxation of pass-through entities: While the House bill establishes a new pass-through rate of 25 percent, the Senate bill establishes a 23 percent deduction for most pass-through income (increased from 17.4 percent in the original bill). Unfortunately, the Senate bill limits the total deduction to half of the W-2 wages paid by the business. The House version is preferable, as the economic activity of many real estate businesses involve using contractors and outside services rather than direct employees.
- Historic Preservation Tax Credit: The House would completely eliminate the credit. In contrast, the Senate bill maintains the 20 percent tax credit for rehabilitation expenditures of certified structures but spreads it out over five years. The current 10 percent credit for non-certified structures would be eliminated. We support maintaining current law on the rehabilitation tax credit.
As the House and Senate work toward reconciliation, NAIOP's legislative team will continue to work with elected officials and congressional staff to ensure that the provisions most favorable to our industry are included in the final legislation. As this process moves forward, we will strategically engage our NAIOP members to enhance the effectiveness of our advocacy efforts.