The last comprehensive revision of the U.S. tax code was in 1986, when President Ronald Reagan signed the bipartisan Tax Reform Act of 1986. The act lowered tax rates and simplified the code by eliminating preferences and deductions, known as “broadening the base.” Since that time, income tax rates have increased and the code has become more complex. Many in Congress again want to reform the tax code by lowering taxes and broadening the base. In particular, many are focused on reducing the tax rate on corporations in order to increase our international competitiveness. Some also want to increase the capital gains tax rate on investment income of wealthy families to pay for additional tax benefits to lower-income families as a means of reducing income inequality.
Many elements of tax reform plans introduced in Congress over the last few years would be harmful to the commercial real estate industry. Some would have substantially lengthened existing depreciation rules, subjecting commercial real property, including leasehold improvements, to cost recovery schedules of 40 years or more. The energy-efficient commercial building deduction (Section 179D) would have been repealed, and some plans eliminated or severely limited real estate like-kind exchanges under Section 1031 the tax code. Capital gains treatment for real estate partnership "carried interests" would have been ended by tax reform plans in the Senate.
In December 2015, the "Protecting Americans from Tax Hikes Act of 2015" was enacted into law. Commonly known as the “PATH Act”, the bill achieved many of NAIOP’s long-sought tax goals, including making permanent the temporary provisions for 15-year qualified leasehold improvement depreciation and the energy efficient commercial building deduction, among a number of other formerly temporary provisions that were made permanent. The legislation also extended bonus depreciation provisions, new markets tax credits, and other tax provisions important to commercial real estate. Making these permanent was important to House and Senate leaders as a first step in facilitating more far-reaching, fundamental and comprehensive reform of the tax code.
House Speaker Paul Ryan, Ways and Means Committee Chairman Kevin Brady (R-TX), and Senate Finance Committee Chairman Orrin Hatch (R-UT) will continue efforts to develop tax reform plans prior to the 2016 presidential election in order to lay the framework for the next president.
NAIOP supports reform of the tax code to make it simpler and to foster economic growth. We oppose proposals that would unfairly disadvantage investment in real estate as compared to other asset classes. We support maintaining depreciation schedules for leasehold improvements that reflect the true economic life of the assets, and oppose measures to eliminate or curtail the use of Section 1031 tax-deferred exchanges or change the capital gains tax treatment of carried interest compensation. We believe a meaningful differential between tax rates on capital gains and ordinary income is vital to the real estate industry.
Vice President for Government Affairs
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