Real estate industry professionals and investors should consider the "Unified Framework for Fixing Our Broken Tax Code" (the Framework), a new tax reform proposal released on September 27, 2017, by the Administration and Congressional Republicans. The Framework states that it is intended to simplify the tax code and lower rates. While the document lacks specifics, it does outline a way forward for tax reform, and touches on issues of significance to the real estate industry.

Of note to all taxpayers, the Framework contains proposals to set individual tax rates at 12%, 25%, and 35% — with allowance that "an additional top rate may apply to the highest-income taxpayers." The Framework also includes proposals to repeal the alternative minimum tax (AMT) for individuals and corporations, as well as estate and generation-skipping taxes. Apart from the low-income housing and the research tax credits, the Framework calls for the elimination of most other tax credits. Most itemized deductions would be eliminated under the Framework, other than the deductions for home mortgage interest and charitable contributions.

Under the Framework, businesses could see a 25% rate for flow-through entities (e.g., partnerships and S corporations)¹ and 20% rate for corporations. Additionally, the Framework calls for immediate expensing of investments in depreciable assets placed in service after September 27, 2017, excluding structures, for five years. Furthermore, the deduction for net interest expense could be limited when "incurred by C corporations" but is not otherwise extended to other entities.

See Tax Alert 2017-1563, for more detailed coverage of the Framework.

Implications for the Real Estate Industry

While the Framework did not provide significant detail around the specific proposals, there are some noteworthy points for the real estate industry, including:

— The proposed corporate and pass-through tax rates under the Framework fell into the range that most were expecting.² Interestingly, though, the Framework did not mention rate reduction for capital gains and dividends. Whether such rate reductions will be part of the equation as the legislative process moves ahead bears watching.

— The narrowing of the immediate expensing proposal under the Framework is of particular import since it now excludes "structures" as well as land. Previous tax reform proposals had only excluded land from their immediate expensing proposal and such proposals did not have a defined term (e.g., five years). Further clarification as to what is and is not a structure for these purposes will be important to understand.

— The deduction for net interest expense under the Framework would not be completely eliminated as it was in previous tax reform proposals.³ Instead, the deduction for net interest expense would be limited and the proposed limitation would be initially targeted towards corporations (with non-corporate taxpayers a secondary consideration). Using leverage and deducting interest expense are particularly important for the real estate industry, meaning a close eye must be kept on how this proposal evolves.

— The elimination of the state and local tax deduction (including the property tax deduction) for individual taxpayers will likely affect high-tax jurisdictions and homeowners' disproportionately.

— Not mentioned by the Framework were carried interest reform, the potential repeal of the like-kind exchange regime under Section 1031 or the potential repeal of FIRPTA. Each of the foregoing has either appeared in a previous tax reform proposal or been the subject of a significant lobbying effort around tax reform. Whether the Framework's silence on each of these topics indicates their continued vitality as part of the tax reform discussion remains to be seen.

The Framework is intended to be a guide for both the House Ways and Means Committee and Senate Finance Committee as they craft specific tax reform legislation. The path forward to an actual bill, and the timing of such a bill, will emerge as negotiations on tax reform and other legislative agenda items progress. Statements by members of both chambers indicated optimism that tax reform will occur.

———————————————

———————————————
ENDNOTES

¹ The Framework contemplates the adoption of measures to prevent the re-characterization of personal income into business income.

² In April 2017, President Trump called for a corporate tax rate of 15% while the 2016 House Republican "Blueprint" called for a 20% corporate tax rate and 25% rate for pass-through entities.

³ See Tax Alert 2016-1145.