The real estate industry was rewarded this week with the passing of Omnibus Appropriations Bill H.R.1865 (H.R. 1865). Of most significance, the bill extends several real estate-related tax provisions through the end of 2020, such as the section 45L tax credit for construction of new energy-efficient homes and the section 179D tax deduction for energy-efficient commercial building property. This bill also makes these tax incentives retroactive back to 2016. Other real estate tax benefits extended through 2020 were (1) the tax exclusion for home mortgage debt forgiveness; (2) the tax deduction for mortgage insurance premiums; (3) the New Markets Tax Credit; (4) and the section 25C tax credit for energy-efficient improvements to principal residences.
Other tax provisions include the repeal of three health-related tax increases that originated in the Affordable Care Act, disaster tax relief for areas affected by the California wildfires, and retirement savings reforms. The real estate-related provisions are described in the attached summary from the Ways & Means Committee. There also was a flurry of real estate-related tax policy developments in the Nation’s Capital this week highlighted by the following:
- Qualified improvement property technical correction: Earlier this week, Senator Pat Toomey (R-PA) unsuccessfully attempted to pass the technical correction to the cost recovery period for qualified improvement property in the Senate by modifying a pending and unrelated unanimous consent request made by Senate Democrats. There was an objection and the effort failed. Senator Toomey is the lead sponsor of a stand-alone bill, the Restoring Investment in Improvements Act (S. 803), to fix the QIP drafting error. It is co-sponsored by 60 Senators. The House companion, H.R. 1869, is co-sponsored by 297 Representatives. The bipartisan support for the QIP fix is real and I remain optimistic that the technical correction will be enacted in 2020.
- Opportunity Zone final regulations: Yesterday afternoon, Treasury released final regulations implementing the Opportunity Zone tax incentives. The 544 pages of rules should provide our Opportunity Zone Working Group with plenty of holiday reading material. Initial reports suggest that Treasury adopted the key Roundtable recommendations made in our most recent comment letter. For example, it appears that the new rules provide greater flexibility with respect to the investment of section 1231 gain, allow gain to be excluded when assets are sold at the Opportunity Zone business level, and liberalize the proposed restrictions on aggregating assets when measuring whether they have been substantially improved. See Tax Notes below.
- FIRPTA – Senate letter: Yesterday, Senators Johnny Isakson (R-GA), Robert Menendez (D-NJ), and nine other bipartisan members of the Senate Finance Committee sent the attached letter to Treasury Secretary Steven Mnuchin urging Treasury to repeal section 2 of IRS Notice 2007-55. Prior to the Notice, a domestically controlled REIT could sell its assets and liquidate, and the liquidation would be treated as a sale of stock not subject to FIRPTA. The Notice deviated from the longstanding tax treatment of these transactions and treats the liquidating distribution as a sale of the underlying real estate assets. In a post-PATH Act environment where foreign pension funds are exempt from FIRPTA altogether, the Notice can severely complicate the structuring of joint ventures and inbound investments. Treasury recently adopted a policy, prospectively, which provides that taxpayers are not bound by a Notice that promises regulations if the regulations are not issued within 18 months. This same principle should extend to old (and stale) Notices like 2007-55.
- Business interest limitation final regulations: The final regulations on the new 30% limitation on the deductibility of business interest are now under review by the White House Office of Management and Budget. While not a certainty, we are optimistic that the rules will be released before the January 29 TPAC meeting in Washington.
- SALT: Yesterday afternoon, the House voted 218-206 to pass the Restoring Tax Fairness for States and Localities Act (H.R. 5377) and temporarily repeal the $10,000 cap on the state and local tax deduction. The two-year reprieve from the SALT limit in 2020 and 2021 would be paid for with a permanent increase in the top individual tax rate from 37% to 39.6%. The bill is widely viewed as dead-on-arrival in the Senate.
This bill has extended the 179D Deduction and 45L credit from December 31, 2017, to December 31, 2020!