Real Estate Tax News and Updates - 1Q 2017
The New Year seems poised to bring about major changes to the Real Estate industry. New sweeping tax reforms proposed by President Donald Trump and Congressional Republicans are likely to have a significant impact on the industry. Understanding how these reforms could potentially affect the real estate industry requires an examination of relevant proposals laid out in The President’s tax plan and House Republicans’ A Better Way – Our Visions for a Confident America (the “Blueprint”) tax plan.
1. Carried Interests
One such proposal, calls for eliminating the so-called carried interest loophole, which benefits, for example, real estate fund sponsors who receive a share of the fund profits as compensation for services rendered to the fund. These profits generally are taxed at preferential capital gain rates—a maximum rate of 20 percent. The President’s plan calls for eliminating this beneficial tax treatment, and taxing carried interests at ordinary income tax rates—effectively raising the carried interest tax rate. Likewise, the Blueprint would tax carried interests “equal to reasonable compensation” as ordinary income. While eliminating the beneficial treatment of carried interests may worry some investors, this change may not have as much of an adverse impact as some fear; both the President's tax plan and the Republican Blueprint call for slashing overall income tax rates.
2. Tax Rates
a. Individual & Corporate Tax Rates
The President's tax plan and the Republican Blueprint each outline significant changes to current corporate and personal income tax rates. Specifically, both plans would collapse the existing seven personal income tax brackets into the following three brackets: (1) 12 percent for taxable income under $75,000; (2) 25 percent for taxable income from $75,000, but less than $225,000; and (3) 33 percent for taxable income in excess of $225,000. In regards to corporate income tax rates, the President's plan would reduce the top corporate tax rate to 15 percent, down from the current maximum rate of 35 percent. Similarly, the Blueprint would impose a flat 20 percent tax rate on C corporations. Further, both plans would eliminate the alternative minimum tax and eliminate or curtail certain itemized deductions as well as raise the standard deduction for individuals. As indicated in the section above, these proposals would amount to considerable tax cuts for investors.