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What the GOP Tax Reform Framework Means for Apartments

Tax Reform Framework for Apartments

Congressional Republicans and Administration leaders recently released a widely anticipated tax reform framework. (Read the full framework or a White House one-pager). While the package does not go into specific details, it does lay out a number of changes to that tax code that could have a significant impact on the apartment housing industry.

Most notably, the framework:

  • Reduces the maximum tax rate applied to the pass-through entities (sole proprietorships, partnerships and S corporations) to 25 percent. Notably, the framework indicates that the House and Senate will adopt rules to prevent individuals from recharacterizing wage income taxed at higher rates into business income eligible for the 25 percent rate. For example, one option would be to only allow 30 percent of business income to qualify for the 25 percent rate while the remaining 70 percent would be taxed as ordinary income.
  • Limits interest deductibility for C-corporations, but notes that the tax-writing committees will consider the appropriate treatment of interest paid by non-corporate taxpayers, such as pass-throughs. 
  • Identifies the Low-Income Housing Tax Credit as one of two business tax credits to retain: The Research and Development Tax Credit is the second.
  • Provides for immediate expensing of capital investments for at least five years, although it does exclude structures.
  • Collapses today’s seven tax brackets into three of 12 percent, 25 percent, and 35 percent with a possibility of a fourth bracket for the highest income Americans.    
  • Eliminates individual AMT.
  • Sets the top corporate tax rate at 20 percent.

The release of the framework is just a first step in what will be a long and complicated process. Comprehensive tax reform has not occurred since 1986, and while this may be the best chance for a tax overhaul in decades, it is by no means assured.

The Congressional tax committees—the House Ways and Means Committee and the Senate Finance Committee—will now consider the framework and continue to gather input from a variety of stakeholders to add details to the broad framework.

Before lawmakers can actually pass whatever bills result from that process however; Congressional Republicans must first pass a budget resolution so they can use the budget reconciliation process to move tax legislation. Reconciliation allows Congress to expedite passage of certain budgetary legislation with a simple majority vote (51 votes in the Senate, 218 votes in the House—both of which can be secured with only Republican votes).

For that to happen, competing House and Senate resolutions will have to be reconciled, highlighting differences over how much of tax reform must be offset. The House budget resolution would require $203 billion in savings over 10 years, while Senators are reportedly considering allowing up to $1.5 trillion in deficits. 

NAA/NMHC look forward to discussing with Congress our members’ key issues in the proposal, and the impact of the package on the apartment industry and its potential to help solve America’s housing affordability crisis. As we noted in our press release, the country needs 4.6 million more apartments by 2030 just to meet demand, and it’s critical that tax policy supports the production of that housing.

We have spent the past year explaining to lawmakers that the apartment industry is critically important to communities across the country. The Protect the Lease campaign has generated thousands of letters and emails to Congress to date.

Change must be carefully considered to those specific aspects of the tax code that have an outsized impact on the apartment industry. Specifically, tax reform should:

  • Protect flow-through entities
  • Retain the deduction for business interest
  • Maintain like-kind exchanges
  • Ensure depreciation rules avoid harming real estate
  • Preserve capital gains treatment of carried interest
  • Protect the Low-Income Housing Tax Credit (LIHTC)

We will continue working with policymakers on the specific needs of our industry in tax reform so that we can continue serving the 39 million Americans who call apartments home and the 12.3 million jobs supported by the apartment industry.

Provided by NMHC as part of the NAA/NMHC Joint Legislative Program