United States: Proposed U.S. Tax Reform May Impact Investments In U.S. Real Estate

Last week, the long-awaited proposed bill for a comprehensive reform of the U.S. tax code (the "Proposed Tax Reform") was finally released.1 While the Proposed Tax Reform is likely to be heavily negotiated further and possibly revised to a significant extent, in its current form, it entails substantial changes to the existing U.S. tax regime impacting multiple sectors, including the real estate industry.

The Proposed Tax Reform introduced multiple changes and limitations to various deductions currently available to individual U.S. taxpayers. Several of those changes are expected to have meaningful impact on the real estate market. In particular, the Proposed Tax Reform will impose a $10,000 cap on the amount of state and local property taxes that can be deducted for federal income tax purposes. In addition, the Proposed Tax Reform will limit the ability of taxpayers to deduct interest on new mortgages with respect to loans with a principal amount of up to $500,000, a significant decrease from the current $1 million cap (reportedly, however, the Senate tax writers are planning on keeping the mortgage interest deduction limit at $1 million). The Proposed Tax Reform also narrows the current exclusion from capital gains from the sale of primary homes (and eliminates the ability to deduct interest expenses on a second home). If passed, these limitations will significantly reduce the tax benefits currently associated with homeownership (historically a linchpin of the American dream and middle-class status) while increasing the attractiveness of investments in multifamily properties as more homeowners candidates may opt for renting instead. With the homeownership rate already near an all-time low, these limitations are expected to attract significant opposition. Furthermore, the Proposed Tax Reform will eliminate the current ability of taxpayers to claim deductions for state and local income taxes, which may increase the attractiveness of real estate properties in states with low or no income tax (such as Florida and Texas) and conversely possibly weaken the real estate markets in states with relatively high income tax rates (such as New York and California).

In addition to the significant changes to the taxation of individuals, the Proposed Tax Reform includes material changes to the taxation of business entities, which, if enacted in their current form, are expected to impact investments into U.S. real property, including, in particular, by foreign investors. Under current law, real estate joint ventures are commonly structured as partnerships for U.S. federal income tax purposes (using either limited partnerships or limited liability companies). Depending on the nature of the real estate project, the joint venture structure offers preferential tax treatment to investors who are U.S. individuals (or beneficial owners who are individuals). Similarly, this structure allows favorable tax treatment to the U.S. sponsors (aka "promoters") of real estate projects, generally treating their "carry" (aka "promote") as giving rise to capital gains. While the Proposed Tax Reform did not, initially, include any changes to the current treatment of carry or promote, on November 6, the House Ways and Means Chairmen released a second set of amendments which include a three-year holding requirement for partnership interests received in connection with the performance of services (such as carry or promote) to be eligible for the preferential long-term capital gain tax rates.

The joint venture partnership structure often proves challenging to various categories of foreign investors as it generally creates a direct nexus between the foreign investor and the United States, requiring filing of tax returns and payment of taxes to the U.S. government and applicable state and local state tax authorities. Accordingly, many foreign investors choose to invest in U.S. real estate using the so-called "leveraged blocker" structure (i.e., investing through domestic entities treated as corporations, typically LLCs that elect to be treated as corporations, and that in turn are capitalized with a combination of debt and equity). This structure allows foreign investors to avoid a direct nexus with the United States while minimizing the tax leakage associated with the use of a domestic corporate blocker. The contemplated changes under the Proposed Tax Reform may further enhance the after-tax results of the leveraged blocker structure, as it will lower the U.S. federal corporate income tax from a maximum rate of 35% to a flat 20% rate. While the Proposed Tax Reform introduced a new limitation on the ability to deduct net business interest expense on new loans (that would generally be deducted only up to 30% of the adjusted taxable income of the taxpayer for that year, with a five-year carryforward), it does not appear that such limitations would apply to most real estate investments.

For those foreign investors who are comfortable investing thorough U.S. partnerships (and hence potentially being subject to direct obligations to file and pay U.S. federal and applicable state and local income taxes), the Proposed Tax Reform offers a major benefit in the form of a reduced new 25% maximum rate on pass-through business income. For active owners, the Proposed Tax Reform assumes that only 30% of the business income is subject to the said maximum 25% rate while the remaining 70% of the business income is treated as being attributable to labor (and hence subject to ordinary income tax rates, which themselves are being revised and simplified under the Proposed Tax Reform).

In addition, the Proposed Tax Reform repeals the U.S. estate tax effective for tax years beginning 2023 and increases the exemption from U.S. estate tax in the interim to $11.2 million per individual (from roughly $5.5 million). Under current law, U.S. real estate owned by an individual who is not a citizen or a resident of the United States at the time of death is included in the individual's gross estate for U.S. federal estate tax purposes and therefore may be subject to 40% U.S. federal estate tax (unless an applicable estate or other tax treaty provides for a relief). That exposure is a major concern for foreign investors (especially ones investing through flow-through structures) and usually attracts significant planning. If enacted in its current form, the Proposed Tax Reform will make such concerns obsolete.

While the specifics of the ultimate U.S. tax reform (assuming one is passed) remain uncertain and will undoubtedly be subject to material changes from the current proposed form, the provisions of the Proposed Tax Reform offers crucially important insights into the potential framework of the likely and/or possible tax changes. Potential investors into U.S. real estate should consider the implications of that framework. Our multi-disciplinary real estate and structuring team is available to discuss the possible impact of these provisions and potential strategies in the face of the current uncertainty regarding the U.S. tax landscape.


On November 2, House Republicans released the Tax Cuts and Jobs Act.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

In association with
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:
  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.
  • Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.
    If you do not want us to provide your name and email address you may opt out by clicking here
    If you do not wish to receive any future announcements of products and services offered by Mondaq you may opt out by clicking here

    Terms & Conditions and Privacy Statement

    Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

    Use of www.mondaq.com

    You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


    Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

    The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


    Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

    • To allow you to personalize the Mondaq websites you are visiting.
    • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
    • To produce demographic feedback for our information providers who provide information free for your use.

    Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

    Information Collection and Use

    We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

    We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

    Mondaq News Alerts

    In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


    A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

    Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

    Log Files

    We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


    This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

    Surveys & Contests

    From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


    If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


    From time to time Mondaq may send you emails promoting Mondaq services including new services. You may opt out of receiving such emails by clicking below.

    *** If you do not wish to receive any future announcements of services offered by Mondaq you may opt out by clicking here .


    This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

    Correcting/Updating Personal Information

    If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

    Notification of Changes

    If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

    How to contact Mondaq

    You can contact us with comments or queries at enquiries@mondaq.com.

    If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.

    By clicking Register you state you have read and agree to our Terms and Conditions