Tax Laws Should Encourage Growth and Preserve Opportunity in Real Estate

Background      

MBA encourages Congress 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 CRE capital sources, provide a stable foundation for long-term CRE 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 calls 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.

That call for caution is particularly relevant now. Tax reform is on the agenda for the current Administration and Congress. For example, the Administration has indicated it intends to lower tax rates across all tax brackets, to simplify the tax code and to reduce the corporate tax rate, among other changes. However, the specifics the proposal are under development and will likely undergo additional change through the legislative process.

To contribute to the development of any tax reform, MBA joined a coalition of real estate trade associations in December 2016 to send a letter commenting on tax reform to House Speaker Paul Ryan and House Committee on Ways and Means Chairman Kevin Brady. More recently, in January 2017, MBA began working closely with members and allied trade associate to evaluate various tax reform proposals. MBA will continue to work with the Administration and members of the House and Senate to support tax reform that preserves, in particularly, Like-Kind Exchange Treatment, the Low-Income Housing Tax Credit, and the Business Interest Deduction for financing real estate.

Recommendations

MBA encourages Congress 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. As the economy continues its recovery, housing and real estate finance have the potential to play a substantial role in boosting growth. To facilitate this growth, MBA recommends that the principles below guide any tax reform proposal that could materially affect the real estate market. 

Support Commercial Real Estate, Multifamily Rental Housing and the Flow of Capital to All Real Estate Markets

·         The Low-Income Housing Tax Credit (LIHTC) is a critical source of funding for the development of affordable rental housing for low-income households. To continue to promote the development of new affordable housing, the LIHTC program should be preserved and strengthened.

·         The flexibility and broad applicability of the like-kind exchange rule should be preserved. To facilitate the real estate development that will be critical to the growth of the economy, this long-standing rule preserves the ability of property owners to exchange similar properties without the exchange being classified as a sale for tax purposes.

·         The current entity-level tax treatment of pass-through entities should be preserved, including real estate investment trusts (REITs), REMICs, S Corporations, limited liability companies (LLCs), and limited liability partnerships (LLPs). This treatment avoids unwarranted double-taxation and promotes the flow of capital into the real estate and small business segments of the economy.

·         MBA opposes legislative initiatives that would tax carried interest as ordinary income. In many transactions relating to real estate, general partners are compensated based on the performance of the transaction, and this compensation is primarily taxed at the capital gains tax rate. Such compensation often acts as a form of equity in the deal and serves to align interests between parties.

·         Downstream adverse commercial and multifamily real estate impacts of tax policy changes should be identified and mitigated. Tax reform measures that are not targeted to commercial and multifamily real estate, such as lowering rates across all brackets or broadening the base for taxation, can nevertheless have an adverse impact on the industry. We urge policy makers to identify such impacts and to take such measures as are necessary to maintain stability and growth potential. Stimulate New Jobs and Economic Expansion

·         MBA supports aligning the tax rates paid by small and large businesses. Small businesses are critical to new job formation. Most small businesses operate in sole proprietorship, partnership, or S corporation tax structures whereby taxes are paid using individual, not corporate, tax rates. A high overall effective tax rate for small businesses that is substantially higher than the corporate rate can make it difficult for small businesses to retain capital to grow their business and create more jobs.

·         MBA supports tax rules that are stable over time. Economic growth can occur only when businesses are willing and able to make long-term financial decisions. As a result, stable and predictable ground rules are essential to economic growth. Therefore, changes to tax rules should provide transition rules to protect households and businesses from unwarranted harm for decisions made under existing tax rules.

April 2017 

Get Loud with the Mortgage Action Alliance

MAA is MBA's voluntary, non-partisan and free nationwide grassroots lobbying network of real estate finance industry professionals. Participation is simple and FREE. Learn more.