WASHINGTON, DC—The 51-49 passage early Saturday morning of the Senate's tax reform package brought mainly positive response over the weekend from industry groups, who saw good news in areas ranging from commercial real estate finance to small businesses. “The vote by the United States Senate is another step forward for pro-growth tax policy,” says Jeffrey DeBoer, president and CEO of the Real Estate Roundtable.
Although the process of reconciling the two legislative chambers' tax-reform packages has yet to be finalized, DeBoer notes that many provisions in the House and Senate bills “are designed to boost wages, job creation and the overall economy. The proposed new pass-through tax regime, structured differently in each bill, is potentially one of the more significant new incentives to attract growth capital to businesses of all types and sizes. We look forward to working with lawmakers in the days ahead to help ensure that this concept achieves its full potential.” (For more detail on the Senate bill's treatment of CRE, click here.)
For example, the New York Times reported Sunday that investments in mortgages held by REITs would be able to take advantage of the lower pass-through rate instead of being taxed at the higher ordinary income rate. Certain income from gas and oil operators would also qualify for the new, lower rate, in an amendment offered by Sen. John Cornyn (R-TX).
“The Senate went out of its way to confirm that passive investors in these publicly traded investment vehicles get the benefit of the pass-through discount tax rate,” Edward D. Kleinbard, a professor of tax law at the University of Southern California and a former chief of staff for the congressional Joint Committee on Taxation, told the Times.
Another real estate-related amendment, from Sen. Mike Rounds (R-SD), addresses language in Section 13221 of the Senate Tax Reform Bill relating to mortgage servicing rights. “Because of the Rounds Amendment, this package will protect the ability of most Americans to obtain safe, decent shelter and affordable home mortgage credit without disruption,” says David H. Stevens, president and CEO of the Mortgage Bankers Association. The MSR provision in question would have required any item of income that an accrual taxpayer recognizes for accounting purposes, including MSRs, to also be recognized for tax purposes.
“Had this language not been included, the change in tax accounting for MSRs would have had a devastating impact on the flow of capital that supports a robust and competitive real estate finance market, both single-and commercial/multifamily,” Stevens adds. “We thank the Senate for its leadership on this issue.”
Stevens' counterpart at the American Hotel & Lodging Association. Katherine Lugar, cites the job-creation potential of the tax reform package. “This legislation is key for the industry's small businesses in particular,” she says. “Three out of every five hotels are small businesses, and many jobs in local communities are dependent on a thriving hotel and tourism sector. Not only will small business owners benefit, but so will their employees and guests, strengthening the industry and the overall economy. We look forward to seeing tax reform signed into law that will have benefits far beyond our industry.”
The response from the real estate sector wasn't uniformly favorable, though. At the National Association of Realtors, president Elizabeth Mendenhall expresses concern that the curtailing of tax incentives will lead to a 10% drop in the value of most homes.
“Realtors support tax cuts when done in a fiscally responsible way; while there are some winners in this legislation, millions of middle-class homeowners would see very limited benefits, and many will even see a tax increase,” she says. “In exchange for that, they'll also see much or all of their home equity evaporate as $1.5 trillion is added to the national debt and piled onto the backs of their children and grandchildren.”
Meanwhile, Senate Majority Leader Mitch McConnell (R-KY) has expressed confidence that the tax-reform package, which hasn't rated highly in opinion polls nor among economists, ultimately will prove to be a winner. “We think this will produce results, results we will certainly be able to talk to the American people about in the fall of 2018 and 2020 as well,” McConnell said Sunday on ABC's This Week.
Whatever form the package takes by the time it reaches President Trump's desk, Ernst & Young is urging clients to keep a close watch. “While the budget negotiations will now move to the fore, work will continue to get a tax reform bill to the President before year end,” says Michael Mundaca, EY's national tax department co-director and former Assistant Secretary for Tax Policy at the Treasury Department. “If you haven't been paying much attention to this, you need to do so now. Everyone should understand the possible impact of tax reform and companies should consider the financial statement implications.”
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