This week saw the release of a number of tax reform drafts from Senate Finance Committee Chairman Max Baucus. Coming after drafts concerning international tax rules and tax administration, the final release of the week involved depreciation and accounting issues.
A number of these proposals would have negative impacts for home building, multifamily, and real estate in general. It should be noted that, in part, the intent of these proposals is to provide funds to pay for base broadening tax reform, which would lower corporate and individual income tax rates. However, a proposed rate structure has not yet been unveiled.
NAHB’s initial review of the draft proposal flagged the following items that would be of concern for housing and real estate stakeholders:
- Repeal of the tax rules for like kind exchanges.
- The depreciation period for structures, residential and commercial, would be extended to 43 years. This marks a large increase for residential rental property, which holds a 27.5 year period under present law. There would also be longer depreciation periods for all other kinds of assets, including building components.
- The section 179D deduction for energy efficient commercial and multifamily property improvements would be repealed.
- Recaptured depreciation would no longer be taxed at 25% for some rental property owners, but instead would be taxed at ordinary rates (proposed ordinary rates have not been published).
- The home construction contract exception, that allows builders to pay income taxes on home sales after the actual sale (the completed contract method) when the construction period spans two or more years, would be repealed. However, builders would still be able to use the completed contract method provided their average annual gross receipts for the prior three years were less than $10 million (indexed to inflation in 2015).
- Advertising expenses would no longer be immediately deductible as a business expense. Under the proposal, 50% of advertising expenses would be capitalized and claimed over a 5 year period, with the remaining 50% available for immediate write off.
On the positive side, the proposal puts into place a permanent regime of section 179 small business expensing. Business taxpayers could write off immediately up to $1 million of business related tangible personal property, with that limit phasing out beginning at levels of $2 million of business property purchased. Section 179 expensing is a helpful tax simplification rule.
What happens next? NAHB will continue to examine the details concerning this proposal and submit comments to the Finance Committee. This proposal represents the first legislative draft in what is expected to be a long process concerning tax reform. The Senate Finance Committee may release additional draft proposals, and it is expected that House Ways and Means Chairman Dave Camp will unveil his own comprehensive tax reform plan in the coming months.
In the meantime, we will continue to review and analyze the legal and economic implications of these tax proposals, with an eye on potential impacts for housing and construction.