June 29, 2016 Real estate items included in House Republican Tax Reform Blueprint On June 24, 2016, the House Republican Task Force on Tax Reform released "A Better Way: A Pro-Growth Tax Code for All Americans," outlining revenue-neutral tax reform intended to spur economic growth. The plan includes eliminating special-interest deductions and credits in favor of providing lower tax rates. The home mortgage interest deduction, while not targeted for elimination, may face non-specified modification as the plan is further developed. Items of interest to the real estate industry are discussed below. General The plan proposes to simplify the tax code, removing many deductions and credits and lowering the tax rate for each type of filer. Individual marginal tax rates would be reduced from seven to three brackets (12%, 25%, and 33%) down from the current top rate of 39.6%. Active income of sole proprietorship/pass-throughs would qualify for a reduced top rate of 25%. In addition, investment income (net capital gains, dividends, and interest) would qualify for a 50% exclusion and, thus, taxed at graduated tax rates of 6%, 12.5%, and 16.5%. The top corporate tax rate would be reduced from 35% to 20%. Full and immediate expensing would be allowed for investments in tangible property, intangible property, and real property (but not land) while the deductibility of net interest expense would be eliminated. The proposal would allow net operating losses to be carried forward indefinitely (but only against 90% of current year pre-NOL net income) and increased by an interest factor that compensates for inflation and a real return on capital. Both the individual and corporate AMT would be repealed. Individuals The personal exemptions and standard deduction would be consolidated into a larger standard deduction of up to $24,000. All itemized deductions other than the mortgage interest deduction and charitable contributions deduction would be eliminated. However, current tax incentives for retirement savings and education would be retained. Additional changes to the mortgage interest deduction may be made by the Way & Means Committee, but no specifics are offered. The estate and generation-skipping transfer taxes would be eliminated. Implications The proposal is somewhat unusual in that it was issued by the House and not the presidential candidate. The proposal, if enacted, would represent a very significant change from current law. Immediate expensing of capital investment, including buildings, could substantially reduce the effective federal income tax rate on real estate. Conversely, the real estate industry could be heavily impacted by the elimination of the net interest expense deduction. As in prior tax reform negotiations, another major area of contention is likely to be the deductibility of state and local income taxes. ———————————————
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