2008 Tax Legislation Outlook

2007. Although NMHC/NAA and other real estate groups were successful in raising concerns among lawmakers about the impact of the provision on the real estate industry and the economy generally, the carried interest issue is very likely to continue to be examined in 2008 and subsequent years as the search for tax increases to fulfill PAYGO requirements continues.Estate TaxEstate tax reform is another issue expected to receive attention in 2008 and significantly more in 2009. In 2001, Congress passed a law that reduces the federal estate tax each year from 2002 to 2009, and then fully repeals it for one year in 2010. But despite several attempts over the last few years, proponents of the measure have been unable to secure the 60 Senate votes required to make the repeal permanent. As a result, after December 31, 2010, the law reverts back to the higher rates and smaller exclusions that were in place in 2001. Estate tax opponents want to ensure that the law does not revert back to higher estate taxes in 2011. On the other side, estate tax supporters are fighting against a complete repeal of the law in 2010 out of concern that taxpayers will get used to the repeal and will increase pressure on Congress to continue the repeal in perpetuity. A compromise on the estate tax issue is highly likely to develop in the next couple years. President Bush is eager to strike a deal on the issue before his term ends next January, but Congressional opponents of the estate tax repeal may be more inclined to wait until a new administration takes power in hopes of negotiating with a future president more sympathetic to their views. The issue is expected to get considerable attention in 2008, particularly in the Senate Finance Committee where Chairman Max Baucus (D-MT) has already announced his intention to hold a hearing on estate taxes this spring. Nonetheless, the chances of legislation being enacted this year are thought to be somewhat slim.Even though final action on estate taxes is not expected this year, NMHC/NAA will be actively engaged in this issue as the debate in 2008 will likely guide any eventual compromise enacted in 2009 or 2010. The real estate industry’s primary concern is that any compromise bill retains “stepped-up” basis. The 2001 law not only repealed the estate tax in 2010, but it also largely repealed stepped-up basis for that year, which means that estates containing substantial commercial property could find themselves avoiding the estate tax only to have heirs owe substantial capital gains taxes. NMHC/NAA will continue to advocate for estate tax reform that retains stepped-up basis and includes larger exemptions for certain estates and lower rates (similar to how the law will look in 2009).  This Tax Update was prepared by Jennifer Bonar Gray, NMHC/NAA vice president of tax. For more information, contact her at 202-974-2362 or [email protected].