A Ways and Means Committee proposal for tax changes takes out much of the sting the Biden administration wanted.
Recent moves in Congress and the White House seemed to close doors on tax benefits for commercial real estate. But while a new proposal from House Ways and Means Committee chair Richard Neal does mean higher taxes, it would also temper some potential pain.
“With the reconciliation markup process underway, one thing is certainly crystal clear at this point, tax rates are going up,” Nicole DeRosa, senior tax manager at Wiss & Company, tells GlobeSt.com. “Long term capital gain rates are currently slated to increase from 20% to 25%, or 28.8% including [an additional] net investment income tax, which to some might see as a relief since the original proposal had indicated these rates would increase to ordinary rates for high earners.”
Ordinary rates meaning a top 39.6% for individuals making more than $1 million a year that the Biden administration had proposed.
Another softening came for the carried interest tax break. Carried interest is a share of a private equity or fund’s profits that serve as compensation for fund managers and is taxed at favorable rates. Although private equity and hedge fund operators are typically mentioned as the target of the tax changes, real estate fund managers and developers are also sectors that benefit from the treatment.
Senate Finance Committee Chairman Ron Wyden (D-Ore.) and committee member Sheldon Whitehouse (D-RI) filed legislation in August that would have eliminated the measure.
“We are seeing a potential scale back for carried interest as the proposal is to generally require a holding period of five years, up from three years, in order to reap the benefits of preferential tax rates which were rumored at first to be tied to ordinary rates,” DeRosa adds.
But as Howard Gleckman, a senior fellow at The Urban Institute, noted at Forbes, the average holding time for such gains is six years.
“Essentially they are just looking to close the ‘carried interest loophole’ by extending the holding period,” notes DeRosa. “For the average RE professional, it shouldn’t negatively impact them much, assuming they were holding the investment for the average time period.”
A third area where CRE professionals might be hit more is in the additional 20% deduction allowed for a pass-through entity’s qualified business income under the 2017 Tax Cuts and Jobs Act.
“High earners filing jointly who have qualified business income will no longer be able to claim a deduction in excess of $500,000—$400,000 for single taxpayers—after December 31, 2021,” DeRosa says.
Something to remember, though, is that any such proposal is just that. With the need to pass the measure in the House, where some of the softening may not be popular, and to reconcile that version with the Senate, there’s no way to tell yet what might happen.