Tax Reform and the Title Industry
By James. E. Hyland, Esq.
The Pennsylvania Avenue Group
TLTA Federal Legislative Counsel
Oct. 4, 2017
On Wednesday, Sept. 27, Trump and the Republican Congress unveiled a nine-page tax reform blueprint. While it contained a broad outline of a likely tax bill, there are still many details to come, most of which will be sorted out when the tax writing committees in Congress begin the real work of tax reform. As a reminder, Rep. Kevin Brady (R-TX) of Houston is Chairman of the Committee on Ways and Means in the House, the key committee on taxes. Sen. John Cornyn (R-TX) is a senior member of the Senate Committee on Finance, the Senate’s key tax committee.
For individuals, the framework aims to consolidate the current seven tax brackets into three brackets of 12 percent, 25 percent and 35 percent. The plan mentions that another higher bracket is possible for wealthy taxpayers. The plan also eliminates the Alternative Minimum Tax.
For businesses, it reduces corporate taxes to 20 percent. It will also allow businesses to immediately write off, or “expense,” the cost of new investments in depreciable assets (other than structures) made after September 27, 2017 for at least five years.
One issue that was debated among the tax writers was the treatment of the interest deduction for businesses. It appears the compromise on this issue is that the deduction for interest expenses incurred by C corporations will be partially limited. The committees will consider the appropriate treatment of interest to be paid by non-corporate taxpayers.
For small businesses, like title agencies, the framework limits the maximum tax rate applied to the business income of small and family-owned businesses conducted as sole proprietorships, partnerships and S corporations to 25 percent. However, the framework contemplates that the committees will adopt measures to prevent the recharacterization of personal income into business income to prevent individuals from avoiding the top personal tax rate.
The title industry has been watching the tax debate for impact on the real estate economy. The plan preserves the mortgage interest deduction. By doubling the standard deduction to $24,000 for a couple, the plan may diminish the number of people using the home mortgage deduction. The plan also eliminates the deduction for state and local taxes, thus removing the deduction of local real estate taxes.
The combination of the two is one of the reasons that the National Association of Realtors issued a strongly-worded statement disapproving of the cumulative impact on housing. NAR’s president William E. Brown noted the issue with eliminating the state and local tax deduction, saying, “This proposal recommends a backdoor elimination of the mortgage interest deduction for all but the top 5 percent who would still itemize their deductions…At the same time, the lost incentive to purchase a home could cause home values to fall.”
The fate of 1031 like-kind exchanges is also unclear. If this provision of the code survives, it will likely be for real estate. The immediate expensing of business investments may make it a less important tax strategy for assets other than real estate. This will most likely be decided at the committee level. One positive impact of the plan is that overseas assets from U.S.-owned companies would be repatriated and taxed at a one-time lower rate, expected to be 10 percent versus as high as 39.5 percent today. Apple, Microsoft and Google alone are holding nearly $500 billion overseas. Some suggest this will find its way into real estate, new businesses and the stock market.
It is likely the plan will be considered in late October and through November. Congressional leaders hope to complete action by December. To use the procedure known as “reconciliation” (thereby needing only 50 votes in the Senate), Republicans in Congress must also agree on a budget resolution, which takes time and can be politically difficult. The margin of error in both the House and Congress is small and, as we have seen, just a few Senators and a couple of dozen House members can hold the key on critical issues. TLTA will be carefully monitoring the debate and working with our financial and real estate partners to insure the best outcome for our members and the industry.