But lawmakers didn’t specify that the 30-year schedule would apply to all apartment properties; instead, older apartment complexes became subject to the depreciation provision’s general effective date of Jan. 1, 2018. For developers with properties “placed in service” before that date, the change amounted to a large tax increase.
Real estate industry groups described the harsher treatment of pre-2018 rental properties as a “drafting oversight,” reasoning that Congress did not intend to make one depreciation rule for older properties and another for new ones.
“There are few policy arguments for requiring real estate firms” to depreciate older properties over a longer period, several industry associations wrote in a letter thanking Thune, Morelle and Rep. Brad Wenstrup, R-Ohio, a cosponsor, for introducing the fix. “Congress seems unlikely to have intended such a drastic change.”
The Dec. 6, 2019 letter, a day after the bills were introduced, was led by the National Multifamily Housing Council and signed by industry powerhouses including the National Association of Home Builders, National Association of Realtors and Real Estate Roundtable.
The injection of cash into a particularly troubled sector could be timely. The squeezed supply of rental housing, particularly for lower-income renters, was reaching crisis levels before the pandemic, according to lawmakers and experts.
According to 2019 census data, nearly 40 percent of renters spend 35 percent or more of their income on housing, a key measure of unaffordability. Unemployment rates have since nearly doubled, leaving millions of tenants facing eviction and landlords in dire financial straits.
Morelle said in a statement the 2017 law had “endangered our nation’s already critically low affordable housing supply” and that the 30-year depreciation period will “alleviate financial pressure placed on tenants and multi-family home owners, who are now under even greater strain due to the COVID-19 crisis.”
Matthew Berger, who handles tax policy for the National Multifamily Housing Council, said the omnibus provision corrects a flaw in the tax code that “unnecessarily disrupted cash flows and increased the tax liability” of apartment developers. The result was less money to invest either in older assets or to develop new properties, Berger said.
It’s not entirely clear why the fix for older residential properties wasn’t included in the original 2017 tax law.
It’s possible it was just a “drafting error,” as Berger put it, exacerbated by the breakneck speed with which Republicans wrote and passed the complex tax overhaul.
It’s also possible the drafters had their eye on costs, given their budget reconciliation instructions to keep the deficit impact to no greater than $1.5 trillion over a decade. And it’s possible some wanted to ensure the benefit was an incentive for new construction and investment.
But the fix wasn’t merely “technical” enough for the JCT to assign zero cost to it, as the revenue scorekeepers did with a depreciation fix for retail stores and restaurants they said would simply align the law’s text with their own understanding of lawmakers’ intent.
In any event, Ashley thinks industry lobbyists simply dropped the ball in the 2017 negotiations. “Their focus was entirely on preserving carried interest,” he said.
That’s a reference to the more generous capital gains tax treatment real estate and other investment partnerships can claim on their share of a fund’s profits from asset sales. The final 2017 law increased the asset holding period needed to qualify for lower capital gains rates from one to three years, costing investment partnerships an estimated $1.1 billion over a decade — far less than critics of carried interest treatment wanted.
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