A tax code is simply a set of rules that drive and influence economic behavior. Done wrong, tax policy can have disastrous consequences. That happened with commercial real estate after the 1986 Tax Reform Act. That experience highlights the importance of not only getting the policy right, but also of providing a well-designed transition to the new code.

Last year, development, construction and operation of office, industrial, warehouse and retail properties supported some 6.25 million American jobs and contributed $861 billion to U.S. GDP. We need to avoid policies that harm the CRE industry.

Today, Congress has the rare opportunity to rewrite our nation’s tax code in a way that promotes growth for all American businesses. The framework agreed to by the Trump administration and Republican leaders in the House and Senate envisions simplification of our code for the average taxpayer, cutting the number of tax brackets from seven down to three and doubling the current standard deduction for individuals and joint filers.

Simplification is good, but even more important is to usher in tax policies that foster long-term investment that will lead to stronger economic growth. The framework would do that in several ways.

First, many small businesses are organized as partnerships or limited liability companies. This is particularly true in the commercial real estate industry.

In these so-called “pass-through” businesses, owners pay taxes on the income from the business on their personal tax returns, at the individual ordinary income tax rate that can be as high as 39.6 percent. The framework proposes a new, lower business income tax rate for these businesses of 25 percent. That would spur economic activity, investment and job growth. Of course, care must be taken so people do not game the system by characterizing personal income as “business income” to pay the lower tax rate, but the framework specifically charges the tax committees to provide for such protections.

Second, the proposal would allow businesses to deduct the full cost of their investments in the first year, rather than deducting a smaller percentage from their taxes as depreciation over many years.

Structures are not included in this “full expensing” regime, and we think that is wise because we do not want tax-driven real estate development that doesn’t reflect or outpaces the actual demand in a market. But it does present the industry with an opportunity to modernize the currently outdated depreciation rules governing real estate, which call for depreciation over a 39-year period, by far the longest of any asset class.

In today’s rapidly changing world of commercial real estate, featuring energy-efficiency, co-working space, and “wired” structures, buildings become economically obsolete much sooner than in four decades. The preferences and demands of tenants change far more frequently than that, requiring extensive renovations. That’s why Congress should focus on establishing a more realistic life span for commercial property.

Finally, while the framework called for a limitation on the deductibility of business interest that is available to larger corporations, it also allows the tax committees to determine whether this works in other contexts.

Because CRE structures are excluded from the new full expensing regime, builders and owners should be allowed to keep the deductibility of the interest they pay on loans. There is no danger here of a “negative subsidy” — the taxpayer being owed money by the government — which might result if deductibility of interest and full immediate expensing were available to a taxpayer. We expect that the committees and the Trump administration will understand and appreciate the importance of financing in commercial real estate.

Of course, further details are still to be ironed out as House and Senate tax committees try to draft legislation over the coming weeks. Long-standing provisions that are key to the efficient operation of modern real estate markets, such as the ability to defer taxes on like-kind real estate exchanges, must be maintained. There have been assurances that adequate transition rules will be provided, in order to avoid any repeat of the 1986 Tax Reform debacle. The details around tax reform are still scarce, but the early signs, for CRE and the overall economy, are promising.

Thomas Bisacquino is president and CEO of NAIOP, the Commercial Real Estate Development Association.

(3) comments

teapartier

Whenever this tax reform/tax cut bill is published or passesd, 99.9% of the population will turn to their favorite news source/ tax accountant and get the political spin of it's contents. One side will say itt's a disaster and the other will say hoooray, just like Obamacare. .1% of the population will actually read and decipher it and make a logical assessment of the plan. What % do you all under?

hayduke2

Gee, a business person pushing for tax reform that benefits his chosen occupation. Pretty shocking, huh.

DisabledFrederickVeteran

The GOP tax reform outlined would saddle future American generations with untenable debt while providing older wealthy people and thier families with immediate and generational tax relief. This is economic betrayal, preventing the masses of America's young people a path to prosperity to provide disproportionate tax relief to those families which America has afforded much.
How much mountainous debt is enough for our children and grandchildren to incur to persevere the wealthy ruling class in America?

Welcome to the discussion.

Keep it clean. Please avoid obscene, vulgar, lewd, racist or sexually-oriented language.
Engage ideas. This forum is for the exchange of ideas, insights and experiences, not personal attacks. Ad hominen criticisms are not allowed. Focus on ideas instead.
TURN OFF CAPS LOCK.
Don't threaten. Threats of harming another person will not be tolerated.
Be truthful. Don't knowingly lie about anyone or anything.
Be nice. No racism, sexism or any sort of -ism that is degrading to another person.
No trolls. Off-topic comments and comments that bait others are not allowed.
No spamming. This is not the place to sell miracle cures.
Say it once. No repeat or repetitive posts, please.
Help us. Use the 'Report' link on each comment to let us know of abusive posts.