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Tax Reform

NAR acknowledges the complexity of the current tax system and seeks to assure that tax reforms support the goals of homeownership and freedom to buy, maintain and sell real estate.

Background

Over the past five or six years, both of Congress’s tax-writing committees (House Ways and Means Committee and Senate Finance Committee) have been active in holding hearings and developing draft tax reform plans.  However, most of these draft plans have not not moved beyond the discussion draft stage. 

Until late 2013, the tax reform discussion was mostly focused on rate reduction, but no details were provided that would suggest which deductions and tax credits would be reduced or eliminated in order to "pay for" deep rate cuts.  NAR has been particularly concerned about the mortgage interest deduction (MID) and the deduction for state and local taxes (including property taxes).

In late 2013, Former Senate Finance Committee Chairman Max Baucus (D-MT) released a series of staff discussion drafts on tax reform.  Each draft covered a different topic of tax reform, and included some specific proposals to repeal certain tax benefits available under the current tax code.  Important to commercial and rental real estate were proposals to increase the depreciable lives of real property used in business or held for investment to 43 years (from the current periods of 39, 27.5, and 15 years), to raise the tax rate on gain from depreciation recapture from the current 25% to the ordinary income tax rate (now as high as 39.6%), and to repeal the tax rules that allow taxpayers to exchange like-kind real estate on a tax-deferred basis.  In February 2014, Former House Ways and Means Chairman Dave Camp (R-MI) released a comprehensive draft tax reform plan that included many of the same provisions as the Baucus plan that would be negative to commercial and investment real estate, as well as some different ones that would be devastating to residential real estate.

Many stakeholders in the real estate community, including NAR, viewed these proposals as a significant threat, even though there was little chance of the bills advancing in the near-term.  NAR, together with other groups, sent a detailed letter to the Finance Committee in January 2014, which outlined the many reasons why adoption of the Baucus proposals would be a major step in the wrong direction for the nation’s economy, for job growth, and for tax reform.  NAR also expressed grave concern with the Camp plan.

Both Senator Baucus and Representative Camp have now retired, but their tax reform ideas are still considered by many current policymakers to be viable ideas from which to draw for future tax reform plans.  This is especially true when tax reform is considered in a revenue-neutral environment, such as still the case now.  This means that revenues lost from tax rate reduction would have to be made up or offset by the removal or dilution of tax benefit provisions in the tax code.  

The new leaders of the tax-writing committees, Ways and Means Chairman Kevin Brady (R-TX) and Finance Chairman Senator Orrin Hatch (R-UT), have each expressed a strong desire to accomplish tax reform.  And now that President Trump has taken office and has made it clear that he shares the goal of modernizing the tax code, we are facing an environment that is more friendly to the possibility of big changes being enacted to the tax law than we have seen in a long time.  

Until the last election put control of both Houses of Congress and the White House in the hands of the Republicans, there was a significant divide between the parties, who shared power, as to what tax reform should look like.  Generally speaking, Democrats were in favor of increasing the perceived level of fairness of the tax burden in our society.  Republicans, on the other hand, were more concerned about economic growth and job creation.  It is this divide that effectively prevented tax reform from moving toward enactment over these past few years. 

While the two sides of the political aisle still have major differences in their general views of what tax reform should look like, it now appears much more possible that Republican preferences could prevail, especially if a handful of moderate Democrats can be persuaded to join in. 

The path forward to tax reform is still quite cloudy, both as to timing and what might be successfully brought to the finish line. 

However, with policymakers of all stripes expressing a willingness to simplify the tax law and to broaden the base and lower the tax rate, a very real possibility exists that common ground on tax reform can be found.  Along with this possibility is the danger that the tax incentives for owning a home could be diminished for the majority of Americans, and that vital provisions for commercial real estate could be repealed or limited in order to “pay for” lowering the tax rates.