How the Trump Tax Plan will Impact the Real Estate & Construction Industries
Last month, we published a Tax Advisory explaining Donald Trump’s tax plan. The purpose of this article is to highlight a few of its provisions that seem likely to impact the real estate and construction industries.
Capital gain property (including real estate)
Current laws provide favorable federal tax rates on long-term capital gains. Depending on what “regular” tax bracket the recipient is in, the capital gain rates are 0%, 15%, or 20%. This does not change much at all under the Trump plan. The same 0%, 15%, and 20% rates are proposed, again varying depending on the “regular” bracket applicable to the recipient. Those regular brackets differ, but the overall structure and impact of capital gain tax promises to look very much like it does now.
When donated to charity
Charitable contributions of certain property (including appreciated real estate that was held for more than one year) currently generate two significant benefits: (1) a charitable contribution deduction equal to fair market value, rather than cost; and (2) the ability to permanently avoid paying tax on the inherent gain (value in excess of cost basis).
Trump’s plans call for many itemized deductions to be eliminated, but for charitable contributions to survive. However, the plans also call for itemized deductions to be capped overall at $100,000 for single filers and $200,000 for joint filers. It is unclear whether charitable contributions will be subject to the cap, or exempt from it.
When held until death
Currently, an estate tax is assessed on a decedent’s property if the net value at the time of death exceeds $5.49 million. Generally, whether or not the tax applies, beneficiaries who inherit such property receive it with a new cost basis equal to the value as of the decedent’s date of death. Any built-in gain as of that date permanently escapes income taxation. The focus, under current laws, is on the overall estate value. If big enough, it is taxed; if small enough, it is not. Either way, the beneficiary receives a stepped-up basis.
Under Trump’s plan, the focus shifts to built-in gains at the time of death. An estate tax will no longer be assessed on overall value, but if previously-untaxed gains exist at the time of death, and those gains exceed $5,000,000, the gains will be taxed at that time. We are not provided enough details to know with certainty, but it appears that securities not subject to this tax will pass to beneficiaries at historical cost, meaning that the gain remains intact and continues to build.
This represents perhaps the most confusing, or at least unclear, aspect of Trump’s plans. He proposes a flat 15% income tax rate for businesses, which apparently applies to flow-through income. This obviously is very different from current top federal rates applicable to taxable businesses (C-corporations) and individuals (K-1 recipients). However, it is not clear whether the new rate will apply to wages or guaranteed payments derived from those same businesses, and there is much speculation that in exchange for the lower business rate, owners may become subject to a second layer of tax applicable to distributions (something flow-through entity owners generally escape).
Trump calls for an immediate end to the Alternative Minimum Tax. Taxpayers will no longer need to worry about two sets of tax treatments for depreciation, differences in treatment of long-term construction contracts, or other AMT vs. regular tax differences.
We will assume our readers are familiar with the concept of carried interest, but those who are not may benefit from this article that explains it.
Carried interest currently qualifies for long-term gain rates. Trump’s plan calls for an end to the favorable rates, but it is unclear how it will be accomplished. First, his plan simply does not go into much more detail than indicating that the favorable treatment will end. Second, as explained earlier, his plan already calls for significant changes in the treatment of flow-through income. As we already complained above, we are missing enough details that we cannot provide meaningful guidance on how flow-through income will fare generally, so we are even less able to explain how treatment of carried interest will fit into the picture. Trump plans for across the board tax decreases, so it is possible that carried interest will no longer qualify for capital gain rates, but will not be beaten as soundly as it would if top rates remain where they are now.
These are just a few ways that the real estate and construction industry may be impacted by Trump’s tax plans. There will be more to follow as his plans and variants of them make their way through Congress, and we will update you as we learn of them.
Disclaimer of Liability: This publication is intended to provide general information to our clients and friends. It does not constitute accounting, tax, or legal advice; nor is it intended to convey a thorough treatment of the subject matter.