Companies and investors would need to rework tax planning.
The Biden administration announced the latest Build Back Better framework on October 28. It still isn’t clear when the social spending package is up for a vote or even whether it has enough Democratic backing to pass. But if it does become law, there are tax changes that aim to, at least partially, offset the cost.
There would be an impact on commercial real estate industry according to an analysis by the National Multifamily Housing Council.
There isn’t an increase in the top marginal tax rate of 37%. However, for those who make $10 million or more in modified adjusted gross income—AGI less investment interest expense—there would be a 5% surtax. Those earning more than $25 million would see a total surtax of 8%.
Capital gains taxes would see a similar adjustment. The 20% top rate remains in place, but it also sees the dual 5% (minimum of $10 million in modified AGI) or 8% (minimum of $25 million) surtax.
Then there is the expansion of the existing 3.8% net investment income tax (NIIT) that is a Medicare contribution tax. For single filers making over $400,000 annually or married couples with a greater than $500,000 income, the NIIT closes some existing loopholes and applies to capital gains, interest, dividends, annuities, royalties, and rents earned in the ordinary course of a trade or business.
By the NMHC’s reckoning, the combination of surcharges and NIIT expansion would raise the top capital gains rate to 31.8% from the current 20%.
A provision that limited excess business loss deductions under the Tax Cuts and Jobs Act of 2017 and that Congress had retroactively limited to starting after 2020 and that is in effect for the 2021 tax year wouldn’t end by 2027. Instead, it would become permanent. Losses that exceeded business income plus $250,000 for individuals and $500,000 filers would be taxable.
Also, while losses would be carried forward, they couldn’t act as net operating losses and could not offset wages or portfolio income in later years.
Among some proposals that didn’t find their way into the framework were the three-year waiting period on carried interest, an end to like-kind 1031 exchanges as well as stepped-up basis on death, changes to the types of investments people could make with IRAs, and changes to grantor trusts and valuation rules under estate taxes. There were also no expansions of the Low-Income Housing Tax Credit and the Rehabilitation Tax Credit.
In addition, there are some energy efficiency tax credits that will be of interest to CRE. Paying all contractors and subcontractors prevailing wages could result in a five-fold increase of baseline credits. Buildings of at least four stories could receive tax credits of 50 cents per square foot of energy savings that exceed 25% of ASHRAE standards, with additional credits available for incremental percentage point savings of up to $1 a square foot. The New Energy Efficient Home Credit would also extend through 2031.