As tax practitioners continue to wade through the Tax Cuts and Jobs Act (TCJA) to determine how to apply it, lobbying and other industry groups are asking for answers as well. Specific to real estate, the Real Estate Roundtable, a nonprofit public policy organization based in Washington D.C., has urged Treasury to provide guidance clarifying aspects of the real estate trade or business election under the new interest limitation rules, specifically calling out structures common to the industry. The Real Estate Roundtable wrote to Treasury Secretary Steven Mnuchin on February 21, 2018; the following content contains key excerpts from the communication.
In the letter, the Real Estate Roundtable specifically asked for clarification that interest (other than investment interest) on debt incurred by an owner of an entity engaged in a real property trade or business, will be treated as interest allocable to that real property trade or business, and therefore exempt from the new business interest limitations - if that real property trade or business has made (or is treated as having made) an election out of the new interest limitation rule.
Why request this guidance? Real estate investments are often structured using more than one entity and/or using tiered structures for investors to fund the costs. For example, a corporation and a partnership may each borrow money to fund their separate investments in another partnership or a REIT (the lower-tier entity) that will be making the ultimate investment in the real estate. Thus, that ultimate investment will be made by that lower-tier entity using a combination of its own money, money it has borrowed directly, and money it received as an investment from the aforementioned corporation and partnership, which those entities obtained through their own borrowings. In such a case, it should not matter whether the debt that is funding the ultimate real estate investment is borrowed by the lower-tier entity or an upper-tier investor.
The letter to Treasury also provides other examples of common scenarios where the financing of a real property trade or business occurs through a tiered structure, including the following:
As of the date of this posting, the IRS has yet to release any guidance addressing the issues/structures listed above. We will continue to monitor the situation and provide updates as they are available.
Read the full version of the letter now.
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Cohen & Company is not rendering legal, accounting or other professional advice. Information contained in this post is considered accurate as of the date of publishing. Any action taken based on information in this blog should be taken only after a detailed review of the specific facts, circumstances and current law.
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