Additional Background & History
Under the pre-H.R. 1 tax code, businesses could deduct interest payments on amounts borrowed without limitation (except in certain narrow cases involving payments to foreign related parties), which reduced the cost of investment and facilitated increased economic activity by allowing businesses greater access to capital to maintain and expand their operations.
Limiting the interest deduction was presented generally in the House Republican Tax Reform Blueprint in 2016 as a trade-off for immediate expensing.
Because debt financing is particularly important in the real estate industry, CREFC argued during the tax reform debate that restricting this deduction—particularly for real property businesses—risked destabilizing the recovering economy. Beyond the real estate industry, many others, including agriculture, finance, construction, telecommunications, and mining, would be harmed by any new limitations under this provision.
Ultimately—despite tremendous pressure on lawmakers to find revenue to offset various tax reductions in the comprehensive tax reform package—we, along with our industry group partners, were successful in preserving full interest deductibility for electing real property trades and businesses—a big victory for CREFC members and the broader real estate sector.