Lawmakers Propose QIP Fix, Carried Interest Legislation

Lawmakers in the Senate took a first step toward fixing a legislative mistake that unnecessarily burdens commercial real estate practitioners. S.803, sponsored by Senators Pat Toomey (R-PA) and Doug Jones (D-AL) would restore incentives for investments that are being made by owners of commercial, restaurant, retail and other property types.

Congress had intended for the Tax Cuts and Jobs Act of 2017 (TCJA) to shorten the cost recovery period for tenant leasehold improvements, now termed “Qualified Improvement Property” (QIP) on a permanent basis, instead of through annual tax extender legislation as had been accomplished before tax reform. Permanently shortening the depreciation period has bipartisan support from members of both houses of Congress. 

However, as a result of a drafting error in the tax reform bill, QIP investments must be written off over a far longer period than was intended. In some cases, property owners are being forced to spread these deductions out over 39 years. In addition, many property owners are precluded from “immediate expensing” of many of their investments because of the technical error in the bill. 

Fixing QIP is a top NAIOP legislative priority. NAIOP has been working with its allies in the commercial real estate industry and other industry groups as part of a broad coalition advocating for technical corrections legislation to the tax reform bill. Introduction of S. 803 in the Senate is an important milestone in that effort.

The legislation is cosponsored by Reps. Angus King (I-ME), Joe Manchin (D-WV), Rob Portman (R-OH), Pat Roberts (R-KS), Jeanne Shaheen (D-NH), Kyrsten Sinema (D-AZ), Martha McSally (R-AZ) and John Thune (R-SD).

On another front, some Democratic legislators sought to revive attempts to eliminate capital gains treatment for all carried interests. House Ways and Means Committee member Rep. Bill Pascrell (D-NJ), and Sen. Tammy Baldwin (D-WI), introduced identical bills aimed at treating carried interests as wage income, subject to ordinary income rates of taxation.

In the TCJA, lawmakers specifically acted to set the policy of taxing real estate carried interests held for three years as capital gains. No Republicans in either house of Congress have signed on to co-sponsor this measure. The effort is largely seen as a messaging effort in advance of the 2020 presidential elections, where the carried interest issue is seen as a potential populist rallying cry.