Advocacy

Tax Cuts & Jobs Act (H.R. 1) Fact Sheet
Much the same for CRE, but More to Come with Technical Regs 

Last updated: June 1, 2018

Executive Summary

  • The Tax Cuts and Jobs Act (H.R. 1), signed into law on December 22, 2017, is the first comprehensive tax reform package in decades.
  • The legislation aimed to, among other things, make America’s corporate tax rate lower and more competitive on a global level, modernize the tax code’s international provisions and close certain international tax loopholes, and—at least on a short-term basis—bring down rates for some individuals and small businesses (i.e., passthrough entities).
  • The headline accomplishment was to permanently lower the topline corporate tax rate from 39% to 21% in tandem with elimination of the corporate AMT.
  • Many individual and industry-specific tax breaks and incentives were eliminated or replaced with substitutes that expire in seven years, such as the State and Local Tax Deductions (SALT) limiting income and property deductions to $10k.
  • Technical implementing rules could still impact areas of the CRE sector, such as depreciation scheduled and bonus depreciation eligibility for certain property improvements and passthrough income deduction rules.
  • Due to a drafting error, certain property improvements now have MACRS lives, as opposed to the shorter 15-year schedule. Work is ongoing in Congress to fix this in the lame-duck session after the November election.

CRE Issue Quick Facts

  • Unrestricted deductibility of net business interest for “real property trades or businesses” is preserved – at the taxpayer’s election.
  • Electing businesses (above) must use the new alternative depreciation system (ADS) recovery period, which is 40 years for nonresidential real property.
  • Like-kind exchanges also have been preserved for real property – but not personal property.
  • Assets with useful lives under 20 years are eligible for an expansion of ‘immediate expensing’ –100% expensing for the next five years, then phased down by 20% each year between 2023 and 2027.
  • With respect to CRE tax treatment, CREFC’s approach during the tax reform debate was “first, do no harm.” Our objective, along with other industry group partners, was to preserve key tax provisions that are especially impactful for our industry. Many tax issues of greatest interest and import to our industry –treatment of interest deductibility, cost recovery, like-kind exchanges, and carried interest – remained largely intact.

Resources

Steptoe & Johnson Memo on CRE-related Tax Issues, December 4, 2017
CREFC Side-by-Side Comparing Various Tax Vehicles, December 4, 2017

For further Information, visit CREFC’s Resource Center at: https://www.crefc.org/library

Next Steps

  • Implementing the New Tax Law: Implementing the law through the rulemaking process at the Treasury Department will be a long and complex process. The law instructs and/or authorizes the Department to write numerous rules to effectuate the new tax code provisions—a process that likely will take years to complete. Given the magnitude of the reforms, it is estimated that the IRS may have to hire as many as 100 additional staff to draft the rules. Therefore, to a degree, the pace of rulemaking will depend on the outcome of the budget process.
  • Technical Corrections Legislation: There have been numerous technical correction issues identified since the law’s enactment. To address these issues legislatively, 60 votes in the Senate likely will be required. Therefore, passage of any such bill in this mid-term election year will be a very difficult process. The highest probability for success would lie in the 2018 Congressional lame-duck session.

Additional Background & History

The primary changes to the corporate tax code included:

  • The graduated income tax with a top rate of 35 percent would be replaced by a flat 21 percent corporate income tax rate beginning in the 2018 tax year. This change alone would reduce federal revenue by $1.35 trillion in fiscal 2018 through 2027.
  • Most provisions for CRE were preserved, with the exception of the longer asset lives for real estate businesses that elect to deduct 100% of their interest expense.
  • The corporate alternative minimum tax (AMT) is repealed. Corporations could continue to use their AMT credits to offset their regular tax liability. Credits would be partially refundable in tax years 2018 through 2021. Market and Main Street reaction suggests that the early take on the 1000-page bill is positive.
  • Economists generally revised growth numbers upwards on news of U.S. tax reform.
  • A wave of corporations announced plans for capital investments and new hiring due to relief from tax burdens.
  • Over 300 firms have reportedly announced tax-related bonuses for their employees. 

The primary changes to the individual tax code included:

  • For individuals, the final bill maintains seven tax brackets, while lowering most rates, doubling the estate tax exemption, and shielding more taxpayers from the alternative minimum tax (AMT). Most changes would sunset after 2025.
  • Mortgage interest deductions are capped at $750,000 for all properties owned, subject to certain grandfathering provisions (below).
  • Under a grandfather rule, the TCJA changes do not affect home acquisition debt of up to $1 million that was taken out: (1) before 12/16/17 or (2) under a binding contract that was in effect before 12/16/17, as long as the home purchase closed before 4/1/18.
  • To partially offset the cost of lower rates, the measure would modify or suspend a number of credits and deductions, including capping the amount of state and local taxes and mortgage interest that can be deducted (currently capped at $10,000 yearly).
  • The measure would effectively repeal the Affordable Care Act’s individual mandate by eliminating the penalties used to enforce it beginning in 2019. The mandate generally requires taxpayers to have health insurance or face a tax penalty.
  • Critical issues remain unanswered on the individual side, starting with the effects of SALT, the limitations on home mortgage interest deductions and other potential down-draft provisions.
  • As a contextual point, the original House of Representatives 2016 “Blueprint” contained dramatic disadvantages for the CRE sector, including:
  • Interest expense deductible against interest income, but no deduction allowed for interest expense; net interest expense would be carried forward indefinitely and allowed as deduction against net interest income in future years
  • 100% expensing – applied to investments in tangible and intangible property including real property (but not land)
  • Congress also weighed the option of repealing Section 1031 exchanges for real property 
  • NOLs would be carried forward indefinitely; but no NOL carryback
  • CREFC views H.R. 1 as the best possible outcome, considering where the House Republican Blueprint started – with provisions that would have been highly disruptive to the CRE sector and could have caused another real estate-induced recession.

Disclaimer

The information provided herein is general in nature and for educational purposes only. CRE Finance Council makes no representations as to the accuracy, completeness, timeliness, validity, usefulness, or suitability of the information provided. The information should not be relied upon or interpreted as financial, tax, accounting, investment, commercial or other advice, and CRE Finance Council disclaims all liability for any such reliance. © 2018 CRE Finance Council. All rights reserved.
 

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