Tax Laws Should Encourage Growth and Preserve Opportunity in Real Estate

BACKGROUND

Households and businesses take the tax treatment of transactions into account when making long-term economic decisions. For consumers, these decisions include the tax benefits of purchasing of a home. For businesses, these decisions include how and to what extent investments and earnings are taxed. MBA calls for caution with respect to any tax changes that could harm the real estate market recovery or deter capital from being invested in the real estate market.

The President's 2017 Fiscal Year Budget calls for a number of tax changes, including the taxation of carried interest at ordinary income tax rates and a cap on the amount of deferred capital gains for like-kind exchanges that would be set at $1 million. Looking further ahead, we anticipate future tax reform efforts to focus on reducing the corporate tax rate for businesses by eliminating certain deductions and simplifying the tax code for individuals. 

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 following principles guide any tax reform proposal that could materially impact the real estate market:           

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

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

· The flexibility and broad applicability of the like-kind exchange rule should be preserved. 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 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.

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 misaligned, high effective overall tax rate for small businesses 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. Stable and predictable ground rules are essential to economic growth. If tax rules must be changed, transition rules should protect households and businesses from harm for decisions made under existing tax rules.

April 2016

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