Washington Report

Advocacy Updates from Washington D.C.

Senate Passes Inflation Reduction Act with Slimmest Possible Margin

Over the weekend, the United States Senate rejected dozens of Republican amendments on the breakthrough climate change, prescription drug, and tax increase legislation that Democrats unveiled late last month. In the end, the bill was passed with a party-line 51-50 vote with Vice President Kamala Harris breaking the tie in the Senate, which is evenly split between Democrats and Republicans.

As was previously reported, the agreement between Senate Majority Leader Chuck Schumer (D-NY) and Senator Joe Manchin (D-WV) left out all but one relatively minor tax increase that would impact the real estate industry directly. This was a provision to change the tax treatment of carried interests, which are often used by partnerships in the real estate, venture capital, and private equity industries to incentivize founding partners who put together deals by allowing them lower capital gains tax rates if the venture is successful. While the provision seemed to exclude real estate businesses from the change, which would have required a holding period of five years instead of the current-law three years, the legislative language was drafted in a way that could have caused problems to partnerships in all industries.

Accordingly, NAR, along with other real estate trade groups, sent a letter to all senators urging that the carried interest provision be dropped.  Fortunately, Senator Krysten Sinema (D-AZ) offered a successful amendment to strike the provision and replace it with a loss-limit tax offset that would affect few real estate entrepreneurs.

The legislation now goes to the House of Representatives, which is expected to pass the bill on Friday with no changes.

When one considers all the real estate tax increase proposals that were recommended over the past couple of years, the final bill is very good for the real estate industry. While it could have been even more impactful if it also included the positive affordable housing changes, such as the Neighborhood Homes Investment Act and the expansion of the Low Income Housing Tax Credit, the industry has dodged some very large tax bullets.