How Will the Inflation Reduction Act Impact CRE?
Real estate investors throughout the country can breathe a sigh of relief as the Senate passed its historic $430 billion Inflation Reduction Act of 2022 without including the carried interest tax increase.
On a 51-50 party-line vote, the law was approved, with Vice President Kamala Harris casting the deciding vote.
Positive reactions followed the decision to drop the carried interest tax increase. Many noted that keeping the benefit would have created more barriers to housing development.
According to Jeff DeBoer, CEO of the Real Estate Roundtable, ” The carried interest provision would have been a disincentive to investment in real estate particularly in housing… It would have discouraged capital coming into the industry at a time when lenders and the capital markets are already tightening.”
After Senators Chuck Schumer and Joe Manchin announced that they would eliminate the carried interest clause late on Thursday night, Democratic Senator, Kyrsten Sinema subsequently decided to support the legislation.
Sinema also included a provision for an excise tax of 1%, which is expected to generate around $74 billion. She and three other western colleagues added $4 billion for drought resilience.
While the carried interest loophole is protected, real estate leaders are focusing their attention on other aspects in the bill that might impact the CRE market.
Also included in the bill is an increase to the corporate tax minimum, which is expected to generate 40% of the additional income needed to pay for the package as it moves on to the House. In order to enable property owners to deduct the costs of purchasing and developing rental property from their taxes, Sinema also fought for the addition of a depreciation tax deduction exemption.
Abraham Leitner, a tax attorney with Goulston & Storrs, adds that while the new exemption might be another significant gain for real estate investors, certain real estate entities might not be so fortunate.
“Tax on stock buybacks could potentially affect REITs. I think that some REITs have taken advantage of distributions in excess of basis that are dividends,” Leitner stated. “We have to see what the legislation actually says but many REITs do make distributions that are not dividends and it will be curious to see if the tax is going to hit those.”
Senators also allocated $5 billion to incentivize emission reduction over the following ten years. The clause would provide funds for more environmentally friendly, reasonably priced housing and building projects that would reduce carbon emissions.
According to DeBoer, “Those provisions could be stronger and could be more robust, but they are nonetheless positive incentives to be more energy-efficient in the types of equipment and technologies that people use in buildings.”
The Inflation Reduction Act, which intends to fund organizations working toward the nation’s target of reducing carbon emissions by 40% by 2030, is being hailed as the largest expenditure package yet to address global warming challenges.
Investors won’t be concerned about the carried interest tax increase in the near future, but some experts think the discussion is far from over. Every few years, killing carried interest resurfaces as a contentious issue, most notably when it was proposed in 2017 under the Tax Cuts and Jobs Act.
According to Matthew Berger, vice president of taxes for the National Multi Housing Council, “It’s clearly an issue that’s been discussed for well over a decade at this point… It has its proponents and it’s our job to educate policymakers and the policy world at large about the pernicious impact it would have if it were enacted on our industry’s ability to develop housing that this country so desperately needs.”
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