Included in the House Ways and Means Committee hearing on tax reform in May was the Republican House proposal to eliminate net interest deduction. This is causing anxiety for commercial real estate investors and developers as it would disallow the conversion of ordinary income into capital gains for a lower tax rate. Instead, it would be taxed as regular income.

Opponents say that the net interest deduction is a key incentive for commercial real estate investment and that without it the economics of underwriting would be dire and could alter how developers account for debt. The policy was intended to reduce double taxation – where the development’s accrued interest is viewed as income, and a payment on top of that interest is in addition to that income and therefore viewed as a deductible expense.

While President Trump is against the proposal to remove net interest deduction, the House GOP has kept it as an option for tax reform saying that as it currently stands it’s a tax loophole and its elimination would make the economy less susceptible to recessions. They further allege that corporate entities are overstating deductions and underreporting income. House Republicans are looking to deliver a reformed tax plan where companies would be able to treat capital expenses like money spent on hard equipment as a write-off, where they would immediately be able to expense a payment for its full amount.

Although the House plan intends to show how tax reform will grow the economy by generating investments and creating jobs, economists have weighed the impact of the two changes and it has been calculated the tax revenue loss from capital expenditures in the near term would greatly outweigh the positive economic impact from ending the net interest deduction.

Sources:

NAIOP, House Ways and Means Committee Hearing on Tax Reform

Bisnow, Why Eliminating the Net Interest Deduction Is Giving Some CRE Players Anxiety