CRE Industry Sounds the Alarm Over Proposed Changes to Pass-Through Tax Rules

Although Connect CRE’s recent multifamily webinar saw Real Estate Roundtable president and CEO Jeffrey DeBoer express guarded optimism about the industry impact of infrastructure legislation making its way through Congress, the Roundtable and 22 other organizations joined forces to express concerns about a new proposal within that framework. 

Specifically, Sen. Ron Wyden (D-OR), chair of the Senate Finance Committee, proposed a restructuring of pass-through tax rules in the reconciliation bill. The move would raise $172 billion in additional tax revenue from the country’s four million partnerships and LLCs and could be considered as a potential source of revenue for the reconciliation bill, according to the Commercial Real Estate Finance Council (CREFC), which joined the Roundtable in sending a letter to Wyden.  

Specifically, Wyden’s proposal targets section 199A of the 2017 tax reform legislation, due to expire in 2026 anyway. As noted by the Tax Foundation, Wyden would phase out the deduction for taxpayers with taxable income above $400,000, with a full phaseout at $500,000; remove the limitations of the deduction for a “specified service trade and business,” which include services in health care, law, finance, accounting, athletics, consulting, and the performing arts; and disallow the deduction for married taxpayers filing separately, and for estates and trusts. 

“The proposal is a significant tax priority for CRE borrowers in the ongoing reconciliation negotiations,” according to CREFC. “Wyden’s proposals are major changes that would increase the tax burden on very common arrangements that are used in real estate and other active, operating businesses of all kinds.” Nearly half the partnerships that would be affected by these changes are in real estate, the Roundtable says. 

Provisions in Wyden’s draft bill would alter the tax rules that apply when a partnership is formed and property is contributed, “creating new barriers to business formation,” says the Roundtable. “Other provisions would changes the rules when a partnership borrows to finance its growth and expansion, as well as when a partnership distributes profits and gains to the owners.”  

Furthermore, “many of the provisions in Wyden’s draft would apply retroactively to economic arrangements entered into years, and sometimes decades, earlier,” according toi the Roundtable. “A proposal requiring that partners share all debt in accordance with partnership profits could overturn decades of tax law with respect to nonrecourse borrowing by a partnership.” 

Writing last month in the Roundtable Weekly, DeBoer noted, “Partnerships are used to bring parties together to create and grow businesses that propel job creation, new investment, and productive economic activity. Partnerships contribute immensely to the culture of dynamic entrepreneurship and risk-taking that is missing in many parts of the world where business activity is dominated by large, public corporations. In this current environment, Congress should be working on ways to encourage and strengthen partnerships, not cut their knees out from under them.”