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Treasury and IRS Propose 20 Percent Pass-Through Deduction Regulations

Deduction Regulations

Treasury and the Internal Revenue Service (IRS) on August 8 issued proposed regulations regarding the new 20 percent deduction for qualifying income of pass-through businesses (e.g., sole proprietorships, partnerships, S corporations, estates and trusts) enacted as part of the Tax Cuts and Jobs Act. Effective through 2025, the deduction reduces the top tax rate applicable to qualifying multifamily income to 29.6 percent from 37 percent.

The regulations generally appear favorable to the multifamily industry and enable owners and developers to qualify for the deduction. The regulations clarify that many so-called Specified Services – which could have potentially excluded multifamily operations – do not appear to have an adverse impact.

Unfortunately, the proposed regulations do not fully recognize the value of Like-Kind Exchanges. Additionally, while the deduction is applicable to REIT dividends, the proposed regulations do not appear to clarify that REIT dividends held as part of a mutual fund (as opposed to those derived from directly held REIT stock) qualify for the deduction. NAA/NMHC will work the Treasury Department and IRS to address these issues before final regulations are issued.

NAA/NMHC plan to submit comments on this topic in the coming weeks. Comments will be due 45 days after publication of the comment document in the federal registry. NAA/NMHC will keep members up to date on the comment period deadline and would be pleased to receive any feedback with respect to the proposed regulations. For more information on this comment period, please click here.