The Build Back Better Plan Passed the House… What’s In It?

This morning the House voted to move the Build Back Better plan forward. It now awaits a Senate review and vote which is expected over the coming weeks.

We have performed a cursory review of the bill to identify items that may be of interest to real estate investors. The bill has changed a bit since our last update and is expected to change further as it makes its way through the Senate.

What’s in the bill?

Comprehensive Paid Leave

Individuals are entitled to a federal comprehensive paid leave benefit if they: (1) have filed an application under section 2204; (2) have (or anticipate having) 4 or more hours of qualified caregiving during a week, in the 90-day period prior to submitting the application (if the application is filed after caregiving begins), or up to 90 days after submitting the application (in advance of an anticipated need for comprehensive paid leave); (3) have any wages or self-employment income at any time during the period beginning with the most recent calendar quarter that ends at least 4 months prior to the start of the individual’s benefit period and ending with the month before the benefit period begins; and (4) have at least $2,000 in wages during the most recent 8-quarter period that ends at least 4 months prior to the start of the individual’s benefit period.

All types of workers are covered for benefits: full-time and part-time workers including gig workers and other self-employed workers, in both the private and public sector (including federal, state, and local government employees), and without regard to employer size.

An eligible worker’s benefit amount for a month is equal to the sum of the weekly benefit amounts for each week that ends in that month. The weekly benefit amount for a week is based on the worker’s weekly benefit rate prorated for partial leave-taking.

30% Residential energy efficient property

The credit for the cost of qualified residential energy efficient property expenditures is extended, including solar electric, solar water heating, fuel cell, and small wind energy, and geothermal heat pumps. The provision extends the full 30% credit for eligible expenditures through the end of 2031. The credit then phases down to 26% in 2032 and 22% in 2033. The credit expires after the end of 2033. The provision also expands the definition of eligible property to include battery storage technology.

$2,500 new energy-efficient home credit

Section 45L is expanded to include a new energy-efficient home credit through 2031.

In the case of new homes acquired after 2022 which are eligible to participate in the ENERGY STAR Residential New Construction Program or Manufactured Homes Program, the provision provides a $2,500 credit for energy-efficient single-family and manufactured new homes meeting certain energy star requirements.

• Single-family homes must meet the most recent Energy Star Single-Family New Homes Program requirements applicable to such dwelling location as in effect on 1.) the latter of January 1, 2022 or January 1 of two calendar years prior to the date the home is acquired and 2.) National Program Requirement Version 3.1 for homes acquired before 2025 and Version 3.2 thereafter.
• Manufactured homes must meet the most recent Energy Star Manufactured Home National Program requirements as in effect on the latter of January 1, 2022 or January 1 of two calendar years prior to the date the dwelling is acquired
• Multi-family homes must meet the most recent Energy Star Multifamily Home National Program requirements as in effect on the latter of January 1, 2022

$12,500 new qualified plug-in electric vehicle credit

This provision provides for a refundable income tax credit for new qualified plug-in electric drive motor vehicles placed into service by the taxpayer during the taxable year. The credit is limited to one vehicle per-taxpayer per-taxable year.

The amount of credit allowed is:

• $4,000, plus
• An additional $3,500 for vehicles placed into service before January 1, 2027 with battery capacity no less than 40-kilowatt hours and a gasoline tank capacity not greater than 2.5 gallons, plus
• $4,500 if the final assembly of the vehicle is at a facility in the United States which operates under a union-negotiated collective bargaining agreement, plus
• $500 if the vehicle model are powered by battery cells which are manufactured within the United States.

This is a total credit of $12,500 that you can earn for buying a qualifying vehicle. A qualifying vehicle is:

• The original use of which commences with the taxpayer,
• Is acquired for use by the taxpayer and not for resale, which is made by a qualified manufacturer,
• Which is treated as a motor vehicle for purposes of title II of the Clean Air Act,
• Which has a gross vehicle rating of less than 14,000 pounds,
• Which is propelled to a significant extent by an electric motor which draws electricity from a battery which has a capacity of not less than ten kilowatt hours and is capable of being recharged from an external source of electricity,
• Does not have a gasoline tax capacity of greater than 2.5 gallons, and
• Is not depreciable property.

This means you can’t buy a business vehicle, claim bonus depreciation, and also claim this tax credit.

Vehicle price limitations:

• Vans: $80,000
• SUVs: $80,000
• Pick Up Trucks: $80,000
• For any other vehicle: $55,000

The credit is phased out by $200 for each $1,000 of the taxpayer’s modified adjusted gross income as exceeds $500,000 for married filing jointly, $375,000 for head of household, and $250,000 in any other case.

Thus, the credit is 100% phased out when your income is $62,500 over the above thresholds.

$4,000 used qualified plug-in electric vehicle credit

The provision creates a new refundable credit for the purchase of used battery and fuel-cell electric cars after date of enactment through 2031. Buyers can claim a base credit of $2,000 for the purchase of qualifying used EVs, with an additional $2,000 based on battery capacity. The credit is capped at the lesser of $4,000 or 50% of the sale price.

To qualify for this credit, used EVs must generally meet the eligibility requirements in the existing Section 30D credit for new EVs, not exceed a sale price of $25,000, and be a model year that is at least two years earlier than the date of sale.

Buyers with up to $75,000 ($150,000 for married couples filing jointly and $112,500 for head of household filers) in adjusted gross income can claim the full amount of the credit. The credit phases out by $200 for every $1,000 in AGI in excess of the limitation.

30% Credit for qualified commercial (business) electric vehicles

This provision creates a new credit for qualified commercial electric vehicles placed into service by the taxpayer.
The amount of credit allowed by this provision with respect to a qualified commercial electric vehicle is equal to 30% of the cost of such vehicle, or 15% in the case of hybrid vehicles.

• The original use of which commences with the taxpayer,
• Which is acquired for use or lease by the taxpayer and not for resale,
• Which is made by a qualified manufacturer,
• Which is treated as a motor vehicle for purposes of title II of the Clean Air Act or mobile machinery for purposes of section 4053(8),
• Which is propelled to a significant extent by an electric motor which draws electricity from a battery which has a capacity of not less than ten-kilowatt hours and is capable of being recharged from an external source of electricity, or is a fuel cell vehicle based upon the requirements of section 30B,
• Is not powered by an internal combustion and is of a character subject to the allowance for depreciation.

Extension and Modification of Child Tax Credit and Advance Payment for 2022

Provides a one-year extension of the increase in the child tax credit (CTC) as enacted in the American Rescue Plan, and a continuation of advance payments through 2022. For 2022, the CTC is $3,000 ($3,600 for children under age 6), and for most taxpayers, the credit is advanceable.

However, in 2022, unlike 2021, only taxpayers with income below $150,000 (in the case of a joint filer), $112,500 (in the case of a head of household) and $75,000 in the case of any other filer will receive advance payments. The eligibility for advance payments will be based on the taxpayer’s prior tax return information.

SALT Tax Deduction Increased to $72,500

Increases the limitation the deduction for state and local taxes from $10,000 to $72,500 ($36,250 in the case of an estate, trust, or married individual filing a separate return), and extends the limitation through 2031.

15% Corporate Alternative Minimum Tax

The corporate alternative minimum tax (AMT) proposal would impose a 15 percent minimum tax on adjusted financial statement income for corporations with such income in excess of $1 billion. Under the proposal, an applicable corporation’s minimum tax would be equal to the amount by which the tentative minimum tax exceeds the corporation’s regular tax for the year.

Modification of Wash Sale Rules

This section includes commodities, currencies, and digital assets in the wash sale rule, an anti-abuse rule previously applicable to stock and other securities. The wash sale rule in section 1091 prevents taxpayers from claiming tax losses while retaining an interest in the loss asset. The amendments made by this section apply to taxable years beginning after December 31, 2021.

Application of Net Investment Income Tax to Trade or Business Income of High-Income Individuals

This provision amends section 1411 to expand the net investment income tax to cover net investment income derived in the ordinary course of a trade or business for taxpayers with greater than $400,000 in taxable income (single filer) or $500,000 (joint filer), as well as for trusts and estates. The provision clarifies that this tax is not assessed on wages on which FICA is already imposed. The amendments made by this section apply to taxable years beginning after December 31, 2021. Note: this will reduce the value of operating your business out of an S-Corporation… if you are currently running an S-Corporation, get with your CPA (or explore our services) before the end of the year.

Limitation on Excess Business Losses of Noncorporate Taxpayers

This provision amends section 461(l) to permanently disallow excess business losses (i.e., net business deductions in excess of business income) for non-corporate taxpayers. The provision allows taxpayers whose losses are disallowed to carry those losses forward to the next succeeding taxable year. The amendments made by this section apply to taxable years beginning after December 31, 2021. Note: this provision simply makes permanent section 461(l) which allows taxpayers to claim $250k of business losses ($500k if married filing joint) that are in excess of business income.

Surcharge on High-Income Individuals, Estates, and Trusts

This provision adds section 1A, which imposes a tax equal to 5% of a taxpayer’s modified adjusted gross income in excess of $10,000,000 (or in excess of $20,000,000 for a married individual filing separately), and an additional tax of 3% of a taxpayer’s modified adjusted gross income in excess of $25,000,000. For this purpose, modified adjusted gross income means adjusted gross income reduced by any deduction allowed for investment interest (as defined in section 163(d)). The amendments made by this section apply to taxable years beginning after December 31, 2021.

Elimination of the Back-door Roth IRA Strategy

Under current law, contributions to Roth IRAs have income limitations. The income phase-out range for single taxpayers for making contributions to Roth IRAs for 2021 is $125,000 to $140,000 and those earning above $140,000 generally are not permitted to make Roth IRA contributions.

When a person exceeds the income limitation for contributions to a Roth IRA, he or she can make a nondeductible contribution to a traditional IRA – and then shortly thereafter convert the nondeductible contribution from the traditional IRA to a Roth IRA.

This is called a “back-door” Roth conversion.

In order to close this so-called “back-door” Roth IRA strategy, and a similar one for retirement plans, this section prohibits all employee after-tax contributions in qualified plans and after-tax IRA contributions from being converted to Roth regardless of income level, effective for distributions, transfers, and contributions made after December 31, 2021.

In addition, the bill eliminates Roth conversions for both IRAs and employer-sponsored plans for single taxpayers (or taxpayers married filing separately) with taxable income over $400,000, married taxpayers filing jointly with taxable income over $450,000, and heads of households with taxable income over $425,000 (all indexed for inflation). This provision applies to distributions, transfers, and contributions made in taxable years beginning after December 31, 2031.

Funding the Internal Revenue Service

This provision appropriates funding for the IRS as follows:

• $1,931,500,000 for taxpayer services,
• $44,887,500,000 for enforcement,
• $27,376,300,000 for operations support, and
• $4,750,700,000 for business systems modernization.

The provision allows the IRS to utilize direct hire authority to recruit and appoint personnel with such funds. The Commissioner of the IRS is required to submit a plan to Congress detailing how such funds will be spent, and submit periodic reports thereafter detailing the progress of the plan.

What’s Not in Biden’s Plan?

Here is a list of provisions that were previously proposed to be in the budget reconciliation bill, or were in an earlier version of the bill, that are not in the bill released last week:

• 1031 exchange limitations
• Long-term capital gain tax rate increases
• Stepped-up basis limitations
• Corporate tax rate increases
• Individual tax rate increases
• SDIRA disallowance and foreced distribution of syndication investments
• Retroactive disallowance of syndicated conservation easements
• Billionaire wealth tax on unrealized gains
• Stringent bank reporting requirements

Takeaways

The bill has not yet passed the Senate and we expect some pushback and re-write from moderates. The provisions in this bill may continue to change over the coming weeks as a vote nears.

We’ll keep you updated, thanks for being a subscriber!