Takeaways on Tax Reform from NMHC Annual Meeting

The 2017 National Multifamily Housing Council Annual Meeting opened on Tuesday, January 24, in San Diego. Among the first sessions was a joint finance and tax committee discussion of the impact of the Better Way tax reform “blueprint” proposed by Republican House Speaker Paul Ryan. Representatives from the multifamily industry met with members of the House recently to learn about tax code changes proposed and to inform lawmakers about elements of the current tax code important to the industry.

While this blueprint is not yet set in stone, proposed changes in tax code would have both positive and negative effects on the multifamily sector. Here are some takeaways based on what is known so far:

1. The top marginal income tax rate would be reduced from 39.5 percent to 25 percent, and the top capital gains rate would fall to its lowest level ever, at 16.5 percent, down from 23.8 percent (if net investment income taxes in the Affordable Care Act are included in calculations). It is unclear whether carried interest will continued to be taxed as capital gain or as income, but the 25 percent rate is a worst-case scenario. (President Trump has proposed a tax rate of 15 percent on all corporate and business income.)
2. All real estate investments, except for land, would be expensed, rather than appreciated over 27.5 years. Full expensing also provides for a de facto like-kind exchange for all investments, except land, allowing a property owner to sell an asset and effectively defer paying capital gain tax by immediately purchasing another asset. If full expensing is adopted, the 1031 exchange would be eliminated.
3. The estate tax would be repealed. This change will be political, because estate tax only applies to an inheritance of about $10 million or more, so only affects the top 10 percent of taxpayers. It is unlikely to win support of Democrats in the Senate. Trump has proposed that inherited money in excess of $10 million be subject to income tax.
4. The blueprint would eliminate the interest deductible on all types of financing, including mortgages on commercial real estate and single-family homes. The 25 percent tax rate and full expensing is expected to compensate for elimination of the interest deduction, but that remains to be seen. Some members of Congress believe that both expensing and loss of interest deductible are incompatible, as it would result in a negative rate of investment. The interest deductible is the only tax break that applies to older assets, so if it is eliminated and depreciation goes away though full expensing, investors in older assets would pay 25 percent tax on net operating income, according to Ernest & Young Principal Robert D. Schachat. The standard deduction for individual taxpayers would be increased to compensate for eliminating the deductible for interest on home mortgages , rising from $12,600 to $24,000 for a married couple. Trump’s plan would raise it to $30,000 for couples filing jointly. 
5. Immediate expensing of investments would typically preserve like-kind exchanges, but the blueprint denies a deduction for land acquisitions, which represent 15 percent to 25 percent of the cost of a project, as well as any related interest.
6. The blueprint in its draft form repeals the Low-Income Housing Tax Credit (LIHTC), one of the nation’s incentives for building affordable housing. The House Ways and Means Committee has reportedly reached an agreement to retain the Tax Credit program.