On September 27, 2017, President Trump released the Administration's blueprint for tax reform titled "Framework for Fixing our Broken Tax Code" (the "Framework"). The Framework preserves some current law provisions that are key incentives for investing in real estate, including the mortgage interest deduction and the Low-Income Housing Tax Credit, but proposes to limit or eliminate some other key real-estate related provisions, including the deductibility of business interest and Section 1031 like-kind exchanges for investment real estate. The Framework delegates many specifics on the proposed tax code overhaul to the tax writing committees, so the specifics of tax reform is still very largely unclear. In anticipation of legislative language on tax reform, MBA has identified provisions that would impact our industry, and thus, for which we would need to take a position.
The Framework laid out four main principles that are at the core of fixing America's broken tax code:
- Make the tax code simple, fair and easy to understand.
- Give American workers a pay raise by allowing them to keep more of their hard-earned paychecks.
- Make America the jobs magnet of the world by leveling the playing field for American businesses and workers.
- Bring back trillions of dollars that are currently kept offshore to reinvest in the American economy.
Under these four main principles, the Framework is intended to achieve the following specific goals:
- Tax relief for middle-class families.
- The simplicity of "postcard" tax filing for the vast majority of Americans.
- Tax relief for businesses, especially small businesses.
- Ending incentives to ship jobs, capital, and tax revenue overseas.
- Broadening the tax base and providing greater fairness for all Americans by closing
The Framework provides the following specific details:
- For Individuals:
- Increase the standard deduction to $24,000 for married taxpayers filing jointly, and $12,000 for single filers. In addition, the additional standard deduction and personal exemptions for the taxpayer and spouse will be consolidated into this larger standard deduction.
- Consolidate the current seven tax brackets into three brackets of 12%, 25% and 35%.
- Repeal the personal exemptions for dependents and significantly increase the Child Tax Credit. The first $1,000 of the credit will be refundable as under current law.
- Increase the income levels at which the Child Tax Credit begins to phase out.
- Provides a non-refundable credit of $500 for non-child dependents to help defray the cost of caring for other dependents.
- Repeal the existing individual AMT.
- Eliminates most itemized deductions, but retain the deductions for mortgage interest and charitable contributions.
- Retain tax benefits that encourage work, higher education and retirement security.
- Aim to maintain or raise retirement plan participation of workers and the resources available for retirement.
- Repeal the death tax and the generation-skipping transfer tax.
- For Businesses:
- Tax business income of small and family owned businesses conducted as sole proprietorships, partnerships and S corporations at a maximum rate of 25%.
- Reduce the corporate tax rate to 20%.
- Allow immediate expensing for investments in depreciable assets other than structures made after September 27, 2017, for at least five years.
- Partially limit the deduction for net interest expense incurred by C corporations.
- Eliminate current-law domestic production ("section 199") deduction.
- Repeal many of the business credits but retain the Research and Development credit and the low-income housing tax credit.
- Replace the existing, outdated worldwide tax system with a 100% exemption for dividends from foreign subsidiaries (in which the U.S. parent owns at least a 10% stake).
- Treat foreign earnings that have accumulated overseas under the old system as repatriated. Accumulated foreign earnings held in illiquid assets will be subject to a lower tax rate than foreign earnings held in cash or cash equivalents.
- Tax the foreign profits of U.S. multinational corporations at a reduced rate and on a global basis.
Although the Framework provides some details on tax reform, there are still so many developing parts - most of which have been left to the tax-writing committees to develop or work out. Therefore, it is too early for us to make any firm conclusions or position statements - until the full picture emerges in legislative text. Nevertheless, MBA will continue to advocate on behalf of members on the preservation and inclusion of real estate finance-related provisions in any tax reform package that emerges.
MBA's Position/Next Steps:
- MBA supports comprehensive tax reform that will spur long-term economic growth, create jobs, and place more money in the pockets of hard-working Americans.
- MBA supports the intent to preserve the mortgage interest deduction, though in combination with the near doubling of the standard deduction for individuals and households. However, the possibility of limiting or eliminating other critical provisions of the tax code, such as the continued deductibility of business interest and the preservation of Section 1031 like-kind exchanges ("Section 1031") for investment real estate raises concerns.
- MBA will continue to advocate for the full preservation of the BID, as we believe that elimination or limiting the deduction would have far-reaching and damaging impact on many industries - including real estate finance - as changes of this sort will inevitably increase the cost of financing, make debt more expensive (for all businesses), and, in turn, limit real estate activity.
- MBA urges Congress to preserve current law provision that allows homeowners to exclude a portion of the gains on the sale of a home, as we believe this provision increases velocity within the residential marketplace by suitably incentivizing the "move-up" middle class homebuyer.
- MBA urges that any tax reform legislation should be carefully crafted to take into consideration appropriate transition rules in order to minimize any market disruption, and avoid any changes that would disproportionately impact one group of market participants relative to others.
- MBA is poised to offer industry perspectives on appropriate phase ins and other treatments that would accomplish the ultimate goals of pro-growth tax reform while not causing near term market disruptions.
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