What offsets remain on the table, what's out and how it affects the rental housing industry.
President Biden on October 28 went to Capitol Hill and released an updated framework for the Administration’s Build Back Better “human infrastructure” plan. After months of negotiations, this new plan has been scaled back by half from its original $3.5 trillion price tag.
Major provisions include expanded child tax credit, universal preschool, investments in elder care and expansions of Pell grants and free school meals. The proposal also includes $550 billion in clean energy and other climate change initiatives including a credit of up to $12,500 for U.S.-made, union-made electric vehicles, incentives for charging stations, the enhancement of existing home energy and efficiency tax credits and the implementation of a rebate program focused on electrification. The program includes funds to address lead in in drinking water, stormwater resiliency and supports resiliency efforts in Environmental Justice communities.
Of interest to our industry, the plan invests $150 billion in affordable housing provisions including investments in rental assistance, housing vouchers and the construction and rehabilitation of an estimated 1 million affordable homes. Click here to access a more detailed list of housing dollars.
The $1.75 trillion plan is offset by tax increases on ordinary income and capital gains income that would impact upper-income Americans. Left out of the package are any changes to like-kind exchanges, increases in the ordinary income tax rates, the general 20 percent capital gains tax rate, the tax treatment of carried interest and the 20 percent pass-through deduction or the taxation of unrealized capital gains at death. A provision in the Ways and Means bill that would have restricted the ability to use IRAs to make certain types of real estate investments is also not included. Interestingly, the proposal does not include any changes to the current-law tax treatment of state and local income taxes. However, this is expected to be addressed as the package moves forward.
As of this writing, it is unclear whether the revised proposal will enable Democrats to cinch the congressional majorities they need to pass reconciliation legislation.
Following the White House’s updated framework, the House Rules Committee released an updated version of the package. Use the drop down features below to review the key tax provisions in play that would impact the multifamily industry.
Tax Increases in the Updated Framework
Individual Income Tax Rates
Although the Framework does not increase the top 37 percent tax bracket, it imposes:
- a 5 percent surtax on taxpayers earning over $10 million in modified adjusted gross income (AGI) (i.e., adjusted gross income less investment interest expense) and an additional 3 percent surtax on taxpayers earning over $25 million in modified AGI.
Notably, there are no changes made to the 20 percent Section 199A pass-through deduction.
In sum, the top marginal income tax rate would rise to 39.04 percent from today’s 29.6 percent when the impact of the net investment income tax (see below) is included in calculations.
Capital Gains Income Tax Rates
Although the Framework does not increase the top 20 percent capital gain tax, it imposes:
- a 5 percent surtax on taxpayers earning over $10 million in modified adjusted gross income (AGI) (i.e., adjusted gross income less investment interest expense) and an additional 3 percent surtax on taxpayers earning over $25 million in modified AGI.
In sum, the top capital gains tax rate would rise to 31.8 percent from today’s 20 percent when the impact of the net investment income tax (see below) is included in calculations.
Net Investment Income Tax
The proposal would expand the current-law 3.8 percent net investment income tax to include net investment income (i.e., capital gains, interest, dividends, annuities, royalties, and rents) earned in the ordinary course of a trade or business by single filers earning over $400,000 and married couples earning over $500,000. It would not apply to any wages on which FICA is currently imposed.
Excess Businesses Losses
The proposal makes permanent a provision limiting excess business losses that was otherwise set to expire at the end of 2026. Under current law, a non-corporate taxpayer is considered to have an excess business loss if their total business deductions exceed business income plus $250,000 for single filers and $500,000 for joint filers. Additionally, while current law allows excess businesses losses to be treated as a net operating loss, the proposal would modify this treatment and not allow losses to offset wages or portfolio income in future years. Losses, however, could be carried forward.
Tax Increases Not in the Framework
Left out of the Framework are tax increases affecting:
- Like-kind exchanges. NMHC and NAA have long advocated to maintain current-law relative to like-kind exchanges to encourage investors to remain invested in real estate while still allowing them to balance their investments to shift resources to more productive properties, change geographic location, or diversify or consolidate holdings.
- Carried interest. The House Ways and Means Committee’s “human infrastructure” bill would have imposed a three-year holding period on so-called Section 1231 real estate gains.
- Taxation of unrealized capital gains at death. NMHC and NAA support the retention of current-law stepped-up basis rules. Changes to current law could either diminish or discourage the ability of heirs to make improvements to inherited property. Affordable housing inventory could be lost as a result.
- Estate taxes. Notably, NMHC and NAA signed an October 28 letter opposing changes to grantor trusts and valuation rules in the House Ways and Means Committee’s “human infrastructure” bill. That bill proposed to bring grantor trust a decedent owns into that decedent’s taxable estate. Additionally, the bill would have prohibited the use of valuation discounts when non-business assets, including real estate, are transferred.
- Modifications to the types of investments accredited investors may make with IRAs. The House Ways and Means Committee’s “human infrastructure” bill would have restricted the use of IRAs to make certain types of real estate investments.
Low-Income Housing Tax Credit & Rehabilitation Tax Credit
While the House Ways and Means Committee’s version of “human infrastructure” legislation included provisions to expand the Low-Income Housing Tax Credit (LIHTC) and the Rehabilitation Tax Credit, these provisions are not included in the new framework.
We joined an October 25 letter sent by the A Call To Invest in Our Neighborhoods Coalition to President Joseph Biden, Speaker Nancy Pelosi (D-CA), and Senate Majority Leader Charles Schumer (D-NY) asking that final legislation expand LIHTC authority by more than 50 percent. The letter also expresses support for reducing to 25 percent (from 50 percent) the amount of a project that must be financed by tax-exempt private activity bonds in order to access 4 percent LIHTCs. The House Ways and Means Committee-passed reconciliation bill includes these provisions as part of its proposed changes to LIHTC, and it is estimated the bill would provide an additional 1.4 million units.
Energy Efficiency Tax Incentives
Energy Tax Incentives
The proposal would modify energy tax incentives available to the multifamily industry. Firms meeting baseline requirements would receive a base credit, but they would have to meet prevailing wages and apprenticeship requirements to receive a bonus credit.
Specifically, firms can quintuple the base credit if they pay all contractors and subcontractors prevailing wages. Projects would also have to be staffed by apprentices (5 percent of labor hours must be performed by apprentices for projects commencing construction in 2022, 10 percent in 2023, and 15 percent thereafter, with a minimum of one apprentice for each contractor or subcontractor employing at least four workers. Exemptions would be permitted if apprentices are unavailable.
Energy Efficient Commercial Buildings Deduction
Beginning in 2022, the base credit for buildings with four or more stories that exceed 25 percent of ASHRAE standards in effect three years before a building is placed into service would be $0.50 per square foot for energy savings. It would increase by $0.02 per square foot for every percentage point by which energy savings exceed the 25 percent baseline threshold, up to $1.00 per square foot. Bonus amounts, as described above, are available for taxpayers meeting applicable labor requirements.
Additionally, taxpayers would be able to take a deduction for energy efficient lighting, HVAC and building envelope costs placed in service as part of a retrofit. The value of the deduction would be based upon how much energy savings is achieved. A minimum 25 percent reduction would be required to realize a $0.50 per square foot gain in the base credit.
The base credit would be increased by $0.02 per square foot for each additional percentage point in energy savings, up to $1.00 per square foot. Bonus amounts, as described above, are available for taxpayers meeting applicable labor requirements. We have long sought a provision to address investment in building energy retrofits that result in significant energy savings relative to building’s own baseline energy performance to be eligible for the credit. The provision would be effective through 2031.
New Energy Efficient Home Credit
The proposal would extend the New Energy Efficient Home Credit (which applies to buildings of three or fewer stories) through 2031. For multifamily units acquired after 2022, a base credit of $500 is provided for units that participate in the ENERGY STAR Multifamily New Construction Program while meeting both national and regional program requirements. It is, however, unclear whether units will decide to participate in this program. A credit of $2,500 per unit is available if the building meets the applicable labor requirements described above. Finally, a base credit of $1,000 is available to multifamily homes certified as zero energy ready under the Department of Energy Zero Energy Ready Home Program