At the end of January, the House passed legislation that would extend some of the provisions of Trump’s 2017 tax bill and expand the Child Tax Credit (CTC), along with other tax reform measures.
If passed by the Senate and signed into law by President Biden, the Tax Relief for American Families and Workers Act of 2024 would allow real estate investors to continue to claim 100% bonus depreciation, elect to expense depreciable business assets up to an increased limit, and potentially deduct business interest up to a higher limit. The Act would also restore domestic research or experimental costs expensing.
Additionally, the legislation would extend a 2020 tax relief measure that impacts people in qualified disaster areas and restore an increase to the Low-Income Housing Tax Credit (LIHTC) ceiling, which would allow states to issue more credits to affordable housing project developers.
The package offsets the cost of the cuts by curtailing retroactive claims of the COVID-era Employee Retention Credit, which has become a popular target for fraudsters over the years. Most of the provisions will expire at the end of 2025. The Tax Foundation notes that extending the relief measures or making them permanent would be costly, and additional offsets would be required to prevent an increase in the budget deficit.
Will the Senate Pass the Legislation?
The tax relief bill is seen as a bipartisan compromise since it provides for business-friendly tax breaks while supporting affordable housing initiatives and expanding the Child Tax Credit. Qualifying low- and moderate-income families with children would allow them to further decrease their tax liability, and the value would be adjusted for inflation in years 2024 and 2025. Changes in the calculation of the credit would also benefit families with multiple children.
With tax filing season already underway, the timeline is short for the legislation to impact filings this year. It’s likely the bill, which includes measures important to both political parties, will pass in the Senate—an analyst with Raymond James estimates that the chances the bill will be enacted are greater than 50%. Both the White House and Senate Majority Leader Chuck Schumer strongly support the legislation. Nevertheless, there are some potential roadblocks.
Senators from both political parties are asking for a Senate Finance Committee mark-up, which could delay the bill’s enactment. Even if the bill is brought straight to the floor, recommended amendments could change the details of the legislation or require the House to act further. But Senate Finance Committee Chairman Ron Wyden (D-Ore.) expressed enthusiasm about working with his colleagues to pass the bill quickly.
Both sides could challenge the provisions, however. The parties have long debated whether tax breaks for businesses trickle down to American workers or impact economic growth.
For example, a recent study from researchers at the Joint Committee on Taxation and the Federal Reserve Board of Governors suggests that 81% of the gains from the tax changes provided by the 2017 Tax Cuts and Jobs Act (TCJA) go to the top 10% of earners. And the White House Council of Economic Advisers has concluded that the TCJA’s revenue-reducing provisions increased the structural deficit.
A comprehensive quantitative survey of 42 primary studies with mixed results from around the world also shows that corporate tax cuts have a negligible impact on economic growth. The continuation of certain business tax breaks included in the TCJA in the new legislation may, therefore, concern some Democrats.
The Institute on Taxation and Economic Policy also warns that the Tax Relief for American Families and Workers Act may provide outsize gains to foreign investors in U.S. corporations, assist corporations in avoiding taxation while doing little to encourage investment and hurt small businesses genuinely eligible for the Employee Retention Tax Credit.
Some Republicans, on the other hand, argue that the long-term effects of corporate tax cuts on worker wages have yet to be measured and see value in the bill regarding economic growth. But some also blame Democrat spending for inflation, so they may take issue with the revenue implications of expanding the CTC. And some worry the bill would increase the deficit, worsening inflation.
There’s also criticism that the one-year income lookback period proposed by the legislation for determining CTC eligibility weakens incentives for low-income Americans to work because it allows for families to receive the credit in a year when they received no income.
That said, the legislation passed with a 357-70 vote in the House, which seems to indicate there is strong bipartisan support for the package overall.
Benefits of the Proposed Changes to Real Estate Investors
The Tax Relief for American Families and Workers Act would undoubtedly provide benefits to real estate investors if passed. In particular, the bill would provide landlords with more money to make improvements to their rental properties, which would allow for additional rental income and accelerate investors’ real estate portfolio growth.
The proposed legislation “extends 100% bonus depreciation for qualified property placed in service after Dec. 31, 2022, and before Jan. 1, 2026.” That means if you made improvements (rather than repairs) to a rental property during those years, you would be able to deduct the full cost of those improvements, provided they had a useful life of 20 years or less in the first year.
Because you’d be able to reduce your tax burden and potentially even carry a loss into future tax years, you’d have more room in your budget when you need it most: while getting a property ready for rental. Spending that money wisely could contribute to increased revenue for years to come.
The bill would also increase the Section 179 limit, so investors could elect to expense up to $1.29 million in depreciable business assets, “reduced by the amount by which the cost of qualifying property exceeds $3.22 million,” with ongoing adjustments for inflation. While less meaningful for small landlords, the provision offers another way for real estate investors to accelerate depreciation and increase their budgets for improvements.
Investors seeking to develop low-income housing would also benefit from the legislation, which “restores the 12.5% increase for calendar years 2023 through 2025” to the LIHTC ceiling, allowing states to issue more credits to developers of affordable housing projects.
The Bottom Line
The Tax Relief for American Families and Workers Act of 2024 accomplishes both Democrat- and Republican-supported changes to tax law and also achieves some bipartisan efforts. The compromise package is likely to pass, but it may still invite challenges from both parties, which could cause delays.
Should the proposed bill become law, it would only amend the tax code temporarily and is a cost-neutral policy for that temporary period. Extending the provisions would, therefore, require another vote and likely depend on another offsetting measure.
Regardless of which political party you align with, you may disagree with certain aspects of the legislation, but it does provide significant benefits for real estate investors, particularly newbie rental property owners.
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Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.