Tax Laws and Regulations Should Preserve Opportunity and Competition in Real Estate

BACKGROUND

MBA encourages policy makers to support and enact tax laws that support long-term economic growth, which is the foundation of strong commercial, multifamily and residential real estate markets. That includes supporting and enacting tax policies that enhance capital formation and liquidity for commercial real estate capital sources, provide a stable foundation for long-term business decisions, and otherwise foster a commercial real estate finance business climate that supports mortgage bankers.

Households and businesses take the tax treatment of transactions into account when making long-term economic decisions so changes in tax policy can have wide-ranging impacts. For example, consumers making decisions about housing consider potential tax benefits of purchasing of a home compared with renting. Similarly, businesses consider tax treatment of investments, costs, earnings, etc. when deciding where to direct efforts and investment. Therefore, MBA called for caution with respect to any tax changes that could harm the real estate market recovery or deter capital from investment in the real estate market.

TAX REFORM LEGISLATION

On December 22, 2017, President Trump signed H.R. 1, the Tax Cuts and Jobs Act. This comprehensive tax legislation has numerous provisions that affect the commercial/multifamily finance industry. Key outcomes strongly supported by MBA that are reflected in the Tax Act include the following:

  • Preservation of business interest deductibility for real estate
  • Preservation of like-kind exchanges (under section 1031) for real property
  • Preservation of the Low-Income Housing Tax Credit
  • Preservation of the tax-exempt status of private activity bonds that finance affordable housing
  • Preservation of the tax treatment of mortgage servicing rights

REGULATORY IMPLEMENTATION OF TAX REFORM

Although the Tax Cuts and Jobs Act has been enacted, the regulatory implementation of the statute remains critically important.  A number of provisions in the Tax Act require greater clarity and guidance.  Among them, the scope of the pass-through deduction provisions in the new section 199A of the Internal Revenue Code requires clarification.  In particular, the definition of a "specified service business" (that are not eligible for the deduction) is not clear enough to sufficiently eliminate all confusion regarding which types of pass-through entities are eligible for the pass-through deduction.

MBA strongly believes that mortgage banking companies engaged in the financing of real estate (whether commercial or residential real estate), including independent mortgage bankers (IMBs), should not be considered to be "specified service trades or businesses" and, as a result, should be eligible for the pass-through deduction under the new tax law.

This view is based on the fact that mortgage banking companies are in the business of financing real estate, and the underlying business activities, roles and assets of these companies are distinct from those of the types of firms identified in the definition of "specified service trades or businesses" that the provision explicitly excludes from the deduction.

Furthermore, the definition of a specified service trade or business specifically does not include a "financing business" - i.e., the business of financing is not a specified service trade or business.  Since mortgage banking companies are in the business of financing commercial and/or residential real estate, we urge that guidance clarify that mortgage banking companies are eligible for the pass-through deduction.  Clarification of this matter would help promote a level playing field that reflects legislative intent.

May 2018

Related Issues