President Obama submitted the 2017 fiscal budget recently to Congress that included some tax reform proposals that may have an adverse effect on the commercial real estate industry. Many of these proposals have been submitted by the President in previous years and have failed to pass Congress.
The budget submissions include the following proposals:
- Limits on Section 1031 Like-Kind Exchanges. Like–kind exchanges have been in the tax code for 100 years and if eliminated or severely limited may cause instability in the commercial real estate market. The budget proposal would limit deferral of taxable income on like-kind exchanges to $1 million annually and is projected to have a budget impact of $47 billion over 10 years.
- Changes Tax Treatment of Carried Interests to Ordinary Income Rates. Forty six percent of partnerships are formed in the real estate industry, according to the Treasury Department. The President’s budget proposes to change the tax treatment of partnership “carried interests,” or “promoted interests” from capital gains to ordinary income. This may result in a much higher tax rate with a large portion of revenue coming from the commercial real estate industry.
- Extends Health Care Surtax to Real Estate Partnerships. A new proposal would expand the 3.8 net investment income tax included in the Affordable Care Act to many owners and investors of real estate partnerships.
- Increases Capital Gains Tax Rates for Higher Income Taxpayers. The budget proposal would increase capital gains and dividend tax rates for higher income taxpayers from 20 percent to 24.2 percent.
- Eliminates Use of “Stepped Up” basis for Inherited Assets. Currently, the value of inherited property is determined at the time of inheritance. The federal budget proposal would change this to require a taxable gain be calculated based on the original price of the property. This change in the tax code may result in higher taxes for many taxpayers, especially for those individuals who hold on to property for a long time period.
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Source: Office of Management and Budget, “Budget of the United States Government, Fiscal Year 2017” (whitehouse.gov)