Post-Holiday, Senate Turns to Tax Bill

Congress returns from the Thanksgiving holiday this week with lawmakers prepared to focus on tax reform. If all goes according to plan, the Senate could vote on a bill by the end of the week.

Before the break, the House of Representatives passed a sweeping reform measure. The bill passed by a comfortable margin, 227-205. A handful of Republican lawmakers from high-tax states including California, New York and New Jersey, voted against the measure because the legislation severely restricted the state and local tax deduction (SALT).

The House bill would preserve, in whole or in part, or improve upon a number of provisions that are important to the commercial real estate industry:

  • 1031 exchanges.
  • Carried interest for real estate investors, although it now would be subject to a three-year holding period.
  • Tax deductibility of business interest. It’s capped at 30 percent of earnings before EBITDA for businesses not engaged in real estate trades, but remains unchanged for CRE.

The House proposal also improves the treatment of pass-through income, which for many developers would be taxed at a new, lower 25 percent. Unfortunately, the House bill would eliminate the Historic Tax Credit.

The Senate Finance Committee passed its version after a contentious markup on Nov. 16 on a similar, but slightly different, version. That bill is expected to go to the Senate floor for a vote this week. The Senate version:

  • Completely repeals the deductibility of state and local property taxes.
  • Allows a 17.4 percent deduction of pass-through income.
  • Creates seven individual tax brackets, with the top rate of 38.5 percent applying to individuals earning more than $500,000.

The Senate version contains some provisions that are problematic for commercial real estate:

  • The 17.4 percent deduction cannot exceed 50 percent of the W-2 wages paid to employees, which would severely restrict use of the deduction.
  • It would prevent taxpayers from using more than $250,000 ($500,000 for joint-filers) in active losses to offset W-2 income or portfolio income.

One key difference is that while the Senate bill, in order to save $300 billion, would repeal the Affordable Care Act mandate that individuals purchase health insurance, the House bill doesn’t. In order to be able to pass the bill with 50 votes instead of a filibuster-proof 60, Senators are required to draft a bill that wouldn’t cost more than $1.5 trillion. The latest Congressional Budget Office cost estimate comes in at $1.4 billion.

The Senate version does retain the Historic Tax Credit, but limits it by extending the timeframe over which developers take advantage of it.

NAIOP representatives continue to work with Senate tax writers to improve provisions in the bill, and are preparing for conference negotiations between the Senate and the House to make sure the final bill remains positive for CRE and the American economy.