Top Tax Legislative Priorities for the Real Estate Industry

2024 has been a tough year for the commercial real estate industry. Since the Federal Reserve's decision to raise interest rates back in 2022 from near zero to over five percent across 16 months, we’ve witnessed a precipitous decrease in real estate transactions and an increase in cap rates.

We’ve heard about the debt maturity wall. We’ve read about the death of the office. We’ve talked about refining financial models, increasing due diligence, expanding to new geographic markets, and so on. We’ve explored almost every possible avenue to find that “diamond in the rough.” But I’m here to discuss something you may not have considered: legislative advocacy.

Legislative advocacy is an important part of being a real estate professional. It allows individuals, organizations, and businesses to influence the development of laws and regulations and be certain the interests of stakeholders are represented in the policymaking process. Real estate professionals can provide valuable information and knowledge on complex issues and help shape policy proposals.

These looming federal tax topics require your attention and input; legislative advocacy is more important now than ever before.

Tax Relief for American Families and Workers Act of 2024

U.S. Senate Committee on Finance Chair Ron Wyden (D – Oregon) and U.S. House Committee on Ways and Means Chair Jason Smith (R – Missouri) introduced House Resolution 7024 earlier this year. The tax bill was passed by the House of Representatives by an overwhelming vote, but the tax proposal faced significant opposition in the Senate.

If enacted, the tax bill would have reinstated the aptly called “Big Three” business tax breaks:

• Immediate deductions for domestic research and experimentation costs
• Restoration of 100% bonus depreciation
• Reinstatement of the more favorable rule that uses earnings before interest, tax, depreciation, and amortization as the base for computing deductible business interest

It also would have terminated the employee retention credit (effective January 31, 2024) and extended child tax credit benefits.

The proposal may not be dead yet. It’s within the realm of possibilities for Senate Majority Leader Chuck Schumer to reintroduce the legislation again later this year.

Tax Cuts and Jobs Act of 2017

Many of the tax changes from the Tax Cuts and Jobs Act of 2017 (TCJA) will expire (often referred to as “sunset”) at the end of 2025. This means on January 1, 2026, the law will revert to the tax law before the TCJA’s passage.

Congress may act to extend some or all of the expiring business tax provisions:

Qualified business income (QBI) deduction

Section 199A of the Internal Revenue Code provides many owners of sole proprietorships, partnerships, S corporations, and some trusts and estates, a deduction of income from a qualified trade or business. Non-corporate taxpayers are allowed to deduct up to 20% of their qualified business income, plus up to 20% of qualified real estate investment trust dividends and qualified publicly traded partnership income.

The QBI deduction effectively reduces the income tax rates on passthrough business income. In 2026, the tax rate on passthrough business income will increase 10% for those in the top tax bracket.

Bonus depreciation on qualified property

Beginning January 1, 2023, the amount of allowable bonus depreciation decreases by 20% each year. For example, the 60% rate in 2024 is scheduled to decrease to 40% in 2025 and 20% in 2026.

State and local tax (SALT) deduction

The TCJA capped the itemized deduction at $10,000, which had a significant impact on taxpayers in higher-tax states. This also led to many states (and not just the higher-tax ones) to enact passthrough entity tax (PTET) regimes.

An unlimited state tax deduction will also create alternative minimum tax (AMT) for many taxpayers, especially residents of certain states. Most taxpayers haven’t had to worry about AMT much since 2017, but it will become a concern again.

Also, what will become of the states’ PTET regimes after the expiration of the SALT cap?

Lifetime gift and estate tax exemption

The TCJA more than doubled the lifetime gift and estate tax exemption, changing the lifetime exemption from $5.49 million in 2017 to $11.18 million in 2018, adjusted each subsequent year for inflation. The current lifetime gift and estate exemption for an individual taxpayer is $13.61 million. At the end of 2025, this is scheduled to be cut in half, and there is no guarantee the exemption will ever be this high again.

Opportunity zones

Opportunity zones were established in 2017 to encourage investment in areas that needed it most, which in turn helped create jobs and promote economic growth in low-income communities. The tax benefits of the program are gradually phasing out, with the temporary deferral of capital gains invested in qualified opportunity funds expiring December 31, 2026 (or earlier, if the investment is sold).

Bipartisan legislation introduced in the House of Representatives in 2023 would extend opportunity zone deadlines for two years, permit new tax structures, eliminate certain high-income opportunity zone census tracts, establish new reporting information, and enhance transparency.

Other potentially heavy constraints

Several other tax policies have been introduced over the years that would significantly limit capital formation, reduce private investment, and curtail risk-taking.

Taxing unrealized gains

This mark-to-market regime, also dubbed the “billionaire tax,” would tax the appreciation of assets on an annual basis, regardless of whether the asset was sold.

In the case Moore v. United States, the Supreme Court reviewed the scope of income taxes constitutionally allowable under the 16th amendment. The ruling, which favored the United States government, has some fearful this decision could be a slippery slope for future legislative proposals on taxing unrealized gains.

Capital gains tax rate

This proposal would bring the long-term capital gains and qualified dividends rate in line with the proposed top tax rate on ordinary income of 39.6% to the extent a taxpayer’s income exceeds $1 million (or $500,000 for married taxpayers filing separately). The current capital gains tax rate is 20%, or 23.8% if the income is subject to the 3.8% tax on net investment income.

The proposal also included language to increase the 3.8% tax on net investment income to 5% and to extend it to the income of active business owners, which includes real estate professionals. The net investment income tax applies to both capital gains and rental income.

Section 1031 exchanges

A partial repeal of Section 1031 was proposed, which would limit the ability to defer eligible gains over $500,000 per taxpayer ($1 million with respect to married taxpayers filing a joint return). Back in 2017, Congress narrowed Section 1031 by disallowing its use for personal property. In other words, only real property is eligible for gain deferral treatment under a Section 1031 exchange.

Carried interest

Carried interest may be taxed as ordinary income or capital gain, depending on the character of the income generated by the entity.

Lawmakers have introduced various proposals to increase the tax burden on carried interest at various times over the past 15 years. Most recently, carried interest was proposed to be treated as an interest free loan from the limited partners to the general partner that would be taxable upon grant. Imputed interest on the loan would be treated as deemed compensation to the general partners, regardless of profit generation.

How CLA can help with real estate tax concerns

Understanding potential federal tax law changes can help you be a better advocate for your industry and realize the possible impacts to your real estate business and individual tax situation. With a lot up in the air with over the next few years — especially the scheduled TCJA expiration at the end of 2025 — tax planning is imperative.

Our industry tax strategy team can model variables factoring in a wide variety of tax scenarios to better prepare you and your real estate business.

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