From the staff at the MBA (Mortgage Bankers Association)
Summary of Select Provisions in Chairman Camp’s Tax Proposal that Relate to Commercial/Multifamily and Residential Real Estate Finance
On February 26, House Ways and Means Chairman David Camp (R-MI) formally unveiled a comprehensive tax reform proposal.
While the complexity and controversial nature of tax reform make it unlikely to occur before the end of the current Congress, the legislation nevertheless marks an important milestone in the debate and helps set the framework for future discussions. Congressional Republicans and Democrats, as well as the Obama Administration, have all signaled a desire to address tax reform – increasing the likelihood that this could be an area of bipartisan agreement over time.
Low Income Housing Tax Credit
Present Treatment: Owners of certain residential rental property may claim a low-income housing tax credit (LIHTC) over a ten-year period for the cost of rental housing occupied by qualifying low-income tenants.
Proposed Treatment: Under the proposal, the “9-percent credit” for newly constructed property and substantial rehabilitations would be retained but would be subject to certain modifications. The credit period would be extended from 10 years to 15 years. The “4-percent credit” for existing rental projects would be eliminated.
1031 Like-Kind Exchange
Present Treatment: The tax code provides that no gain or loss is recognized to the extent that property is exchanged for property of a like-kind that is also held for productive use in a trade or business or for investment.
Proposed Treatment: The rule allowing deferral of gain on like-kind exchanges would be repealed and would be effective for transfers after 2014. A like-kind exchange would be permitted if a contract is entered into on or before December 31, 2014, and the exchange under the contract is completed before January 1, 2017.
Certain Carried Interest
Present Treatment: Gains from the sale of commercial real estate partnership interests for general partners are currently taxed at the capital gains tax rate.
Proposed Treatment: Under the proposal, partnerships engaged in “real property trade or business” would maintain their current tax treatment. General partners of partnerships that are engaged in providing “services” will have their gains from sale be treated as ordinary income for tax purposes.
Depreciation Term Change for Rental Housing
Present Treatment: Multifamily rental housing has a 27.5 year depreciation schedule.
Proposed Treatment: For new originations, the depreciation schedule for multifamily rental housing would be extended significantly to 40 years.
Residential Mortgage Interest Deduction
Present Treatment: Mortgage interest deduction on interest payments on up to $1 million on acquisition indebtedness (including home improvements) and $100 thousand of home equity indebtedness.
Proposed Treatment: Mortgage interest deduction is allowed for interest payments on up to $500 thousand of acquisition indebtedness. Similar to the current-law AMT rule, interest on home equity indebtedness incurred after the effective date would not be deductible.
Exclusion from Income of Gain on Sale of Principal Residence
Present Treatment: Under present law, a taxpayer may exclude from gross income up to $500,000 for joint filers ($250,000 for other filers) of gain on the sale of a principal residence. The property must have been owned and used as the taxpayer’s principal residence for two out of the previous five years. A taxpayer may only use this exclusion once every two years.
Proposed Treatment: Under the proposal, a taxpayer would have to own and use a home as the taxpayer’s principal residence for five out of the previous eight years to qualify for the exclusion. In addition, the taxpayer would only be able to use the exclusion once every five years. The exclusion would be phased out by one dollar for every dollar by which a taxpayer’s modified adjusted gross income (MAGI) exceeds $500,000 ($250,000 for single filers). The provision would be effective for sales and exchanges after 2014.
Gain on the Discharge of Indebtedness
Present Treatment: Discharge of mortgage indebtedness is not taxable for up to $2 million in gain on discharge if the discharge is the result of a decline in property value or deterioration in borrower’s financial condition. This is applicable for all discharges of indebtedness prior to 2014. Thus far, this has not been extended to discharges occurring in 2014.
Proposed Treatment: Gain on discharge of indebtedness would be taxable.
Deduction of State and Local Taxes
Present Treatment: Taxpayers may take an itemized deduction for state and local income taxes and property taxes.
Proposed Treatment: Taxpayers may take an itemized deduction for state and local taxes on trade or business or business producing income.
Proposed Tax on Large Banks
Present Treatment: Currently, there is no excise tax that applies to the assets of Systemically Important Financial Institutions (SIFIs).
Proposed Treatment: Under the proposal, each SIFI would be required to pay a quarterly excise tax of .035 percent of the SIFI’s total consolidated assets in excess of $500 billion, as reported to the Federal Reserve. The provision would apply to calendar quarters beginning after 2014. After calendar year 2015, the $500 billion threshold would be indexed for increases in the GDP.