Background
After months of negotiations in November 2021 the “Build Back Better” Plan passed the U.S. House of Representatives by a narrow vote of 220-213. The $2 billion (plus or minus) spending plan then went on to the U.S. Senate where there was active posturing by the President and plan supporters along with intense scrutiny and pursuit of Democratic senators not willing to commit to its support. The needed votes for passage in the Senate were not there and the plan was “put on a back burner.” Most recently on January 28th speaker of the house Nancy Pelosi (D-CA) said she does not, “Subscribe to any particular date,” to get the plan passed; effectively not addressing a March 1st deadline being pushed forth by House progressives.
The Plan and The Real Estate Industry
The plan is being discussed here because it is worth mentioning that it contains provisions (specified spending) that would directly affect the real estate industry in a positive way. The plan does include tax provisions previously mentioned by lawmakers which affects taxpayers and the real estate industry.
Just as importantly it does not contain certain key tax provisions previously floated (and included in initial framework drafts) that would have directly adversely affected the real estate industry and individual taxpayers.
Real Estate Provisions
The plan as passed by the House includes at least $255 billion allocated for real estate initiatives. There is $150 billion for affordable housing, $65 billion for public housing repairs, $25 billion for rental assistance and $15 billion for the Housing Trust Fund.
The $150 billion investment in affordable housing is an unprecedented amount and will create more than one million new affordable rental and single-family properties and also includes down payment assistance allowing potentially hundreds of thousands of first-time home buyers to purchase a home.
The $65 billion for public housing repairs will support community-led redevelopment projects, construction, rehabilitation, safety and energy-efficient investments.
It is the intent to incentivize state and local zoning reforms that will enable support and the $255 billion investment in real estate.
Several key Low-Income Housing Tax Credit (LIHTC) provisions are included in the plan as well. The 9% LIHTC per capita and small state minimum allocations will be increased by 10% each year, in addition to inflation, for 2022-2024. For 2025 and thereafter the 9% LIHTCs will be adjusted annually for inflation.
Another key LIHTC provision is a decrease in the 50% financed by test for bonds and 4% LIHTC to 25% for 2022-2026. The limited window of opportunity is intended to accelerate both developers and owners to act quickly.
There are additional energy efficiency tax credits that will affect the commercial real estate community. The plan extends the Sec 25C non-business energy property credit to property placed in service prior to the end of 2031. It also extends the Sec 25D credit for residential energy-efficient property from current scheduled expiration 2023 to 2031 and extends the Sec 48C advanced energy property credit to 2031.
Tax Provisions – What’s Included and What’s Not
The plan as passed by the House contains significant changes to current tax law and just as important—the plan, as passed, does not contain certain significant tax changes included in prior drafts.Those included items affecting taxpayers and the real estate industry include:
- A 5% surtax on income in excess of $10 million ($5 million for married filing separate) and an additional 3% surtax on incomes in excess of $25 million ($12.5 million for married filing separate). This would also apply to non-grantor trusts but at much lower levels–5% surtax on income in excess of $200,000 and a 3% surtax on incomes in excess of $500,000. Individual income tax rates would otherwise not change;
- The 3.8% Net Investment Income Tax would expand and apply to active trade or business income for taxpayers earning more than $400,000. This would include limited partners of a limited partnership and/or shareholders of a subchapter S corporation;
- “Excess business losses” in excess of $500,000 ($250,000 married filing separate) would be carried forward as business losses (and still subject to the business loss limitation) and not converted to net operating losses; and
- Losses recognized on worthless partnership interests would be treated as capital losses (ordinary losses as is often the case under current law) and taken at time of event establishing worthlessness and not at year end (under current law).
Those items not included in the plan but previously mentioned are:
- Changes affecting “like kind” exchanges under Section 1031;
- Changes affecting the “pass-through deduction” under Section 199A;
- Changed the tax treatment of carried interests;
- Changed the $10,000 annual cap on state and local tax deductions; and
- Increased individual and corporate income tax rates (separate from surtaxes).
The Future
As of this printing the plan has not been scheduled for a vote and other legislative items have taken priority. The Democrats don’t currently have the votes in the Senate. It remains to be seen if President Biden will decide to decompose the plan and pass individual portions (some lawmakers referring to them as “chunks”) independently as has been discussed by other key Democrats. The real estate industry waits to see what will occur.
Sandy Klein, CPA, is a partner at Shanholt Glassman Klein Kramer & Co., New York, N.Y.
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