APARTMENT ADVOCATE
NATIONAL APARTMENT ASSOCIATION / NATIONAL MULTIFAMILY HOUSING COUNCIL
Tax Reform Blueprint: The Good, the Trade-Offs and the Bad News on LIHTC
House Republicans released their tax reform blueprint on June 24, which has significant implications for owners, operators and developers of apartment housing. NAA / NMHC are currently evaluating the blueprint and see some undeniable positives in the form of lower rates on business income and capital gains, some trade-offs on cost recovery and the unacceptable elimination of the Low-Income Housing Tax Credit( LIHTC). Although the blueprint has little chance of enactment this year, it is likely to form the basis for legislation House Republicans hope to move in 2017.
Of course, the next president, and the party controlling the Senate following this November’ s elections, will also have a critical role to play in shaping any tax reform legislation that may ultimately be enacted.
NAA / NMHC would appreciate any reaction you may have to the blueprint as we frame our reaction. Here’ s a description of the proposals in the blueprint that would have the most impact on the apartment housing industry:
Tax Rate on Pass-Through Businesses Income: The apartment housing industry is dominated by“ flow-through” entities( e. g., LLCs, partnerships, S Corporations, etc.) instead of publicly held corporations. This means that the company’ s earnings are passed through to the partners who pay taxes on their share of the earnings on their individual tax returns. The blueprint would tax pass-through business income at a 25 percent rate, which is down from a current-law maximum of 39.6 percent. Notably, the blueprint would tax individual wage income at a maximum rate of 33 percent with intermediate rates of 12 percent and 24 percent.
Capital Gains Tax Rates and Carried Interest: The blueprint would tax capital gains, dividends, and interest at ordinary income tax rates subject to a 50 percent exclusion. Thus, capital gains would effectively be taxed at maximum rate of 16.5 percent, which is lower than the 20 percent currentlaw maximum rate( not including the 3.8 percent net investment income tax). The proposal does not indicate any changes to the tax treatment of carried interest, seemingly leaving such income subject to the proposed capital gains rules.
Depreciation, Business Interest Deductibility and Like-Kind Exchanges: The proposal would radically overhaul the tax treatment of depreciation, business interest deductibility and like-kind exchanges. Most notably, business investments with the exception of land purchases, but including the purchase or construction of an apartment building, would be fully expensed instead of de-
34 | TRENDS • AUGUST 2016 www. aamdhq. org