Members of Congress are inching closer to reconciling key differences for which real estate companies would qualify as “pass-throughs” for tax cuts, sources close to the talks told The Real Deal.
The original House and Senate tax bills differed in which firms organized through pass-throughs, such as LLCs, would qualify for lower tax rates on certain income. The House version was seen as being more favorable to “capital-intensive” real estate firms – think small developers or old-money families sitting on lots of multifamily holdings – while the Senate version would exclude many real estate companies with major assets that contract out the majority of their labor and as a consequence have small payrolls .
But the tax conference is debating what one source described as a potential “hybrid” of the two bills.
While the final bill is likely to favor the Senate language on this issue, the source said, negotiators are looking at options that would allow capital-intensive firms, like many real estate companies are, to qualify for some degree of the pass-through tax cuts.
The House had passed a 25 percent top tax rate for some pass-through income (considered by legislators to be 30 percent of a qualifying company’s total income). Real estate investors would see that as a boon.
The Senate, though, proposed a 23 percent deduction for pass-through income, which would also be restricted to no more than 50 percent of a company’s total payroll – if payrolls are small, as they are for many family-run enterprises, this deduction wouldn’t amount to much.
The new approach discussed, the source said, would allow real estate firms left out in the Senate bill to avail of, at some level, the tax cut-benefits planned for eligible pass-throughs.
How much the final benefit to owner would be exactly, however, is still up in the air.
On Wednesday, news broke that Republicans have agreed to a 20 percent deduction for eligible income.
Earlier this week, the National Association of Realtors said the House language left unclear whether many types of real estate firms, including brokerages, would qualify at all as eligible pass-throughs, prompting some to consider incorporating in order to take advantage of expected rate cuts.
Lawmakers have said the final bill should move to floor to both chambers of Congress for floor votes nest week.