A Legislation Update with Chip Watts, CCIM

A Legislation Update with Chip Watts, CCIM

On 02, Nov, 2017

2017 has been an interesting year across the nation in the legislative arena. In DC, the transition from President Obama to President Trump’s leadership teams have taken quite a while to accomplish and many vacancies will not be filled by year’s end – placing many agencies in awkward positions while trying to continue their missions and serve the general public’s interest with reduced staff. For example, the Housing and Urban Development agency has had many retirements and, while the top positions have been filled, many of the mid- to senior-level positions have not.  

In addition to a Republican-controlled Senate that can’t seem to garner enough votes to pass meaningful legislation, President Trump has been inundated with natural disasters over the past few months.  Hurricanes Harvey, Irma, Maria and Nate have all hit the United States mainland or its territories, causing extensive damage and forcing Congress to extend the National Flood Insurance Program to December 8, 2017. Unfortunately, this program is unsustainable in its current form and, prior to the recent hurricanes, was underwater with an expected one-year shortfall of approximately $1.4 billion dollars.

In a recent letter to the president early in the month of October, Office of Management and Budget Director Mick Mulvaney stated, “The recent hurricanes have inflicted projected losses of $16 billion. As a result, by the latter part of this month, the NFIP will have fully exhausted its financial resources (including its $30.4 billion in borrowing authority) and will be unable to pay claims” signifying an impending cash crunch.

NAR is urging the House of Representatives to bring up and pass HR 2874: The 21st Century Flood Reform Act at the first available opportunity. In the interim, NAR is working with Congress to ensure that the NFIP will not shut down until a replacement program is in place.  In addition to the hurricanes, the extensive fire damage in the western states has also taken its toll on the resources available to fire victims. The Federal Emergency Management Agency (FEMA) has been burning through cash trying to keep up with the natural disasters and will have to approach Congress again for another infusion of money.

In addition to the high-profiled attempts to repeal and replace the Affordable Care Act that have recently failed, Congress will be broaching the subject of tax reform prior to the Christmas break.  Many people have varying views on the subject; however, most of our colleagues are clear about what needs to be protected from tax reform: Mortgage Interest Deductions (MID) and 1031 Exchanges. At this point, Republicans would consolidate the number of tax rates from seven today to just three: 12%, 25% and 35%. The plan would also increase the standard deduction, increase the child tax credit and repeal the alternative minimum tax. The proposal would also drop the corporate tax rate to just 20%; but, it removes the ability for individuals to deduct property tax payments.  

Our colleagues across the nation do not seem divided on the issue of tax reform itself (most agree with the proposal); however, our profession is split regarding the deduction of property tax payments. The reason? It depends on which state you live in and how large property taxes are as a percentage of home value.

In Alabama, property taxes are quite low compared to other states and the impact to the removal of this deduction is much smaller than if you lived in, say, California.  In fact, Hawaii and Alabama have the two lowest property tax rates in the nation as a percentage of home value at 0.28% and 0.43% compared to New Jersey and Illinois at 2.38% and 2.32%, respectively. The difference between the state with the lowest rates—Hawaii—and New Jersey’s highest rate is a whopping 2.1 percent, which can come out to a pretty significant property tax bill, particularly on a luxury home – but it’s all relative. Some states that impose formidable property tax rates, such as New Hampshire and Texas, give residents a few breaks in other major tax categories. For example, Texas & Florida have no state income tax. These states rely heavily on property taxes to make ends meet. On the other side of the equation are states that impose high taxes across the board, such as New Jersey and Illinois.

Of course, other legislative issues are still being played out in several states, including Landlord/Tenant law changes and how to deal with the legalization of marijuana, both hot button topics that may affect Alabama in the near future.  Even more issues include tightening the leash on fake service dogs, website accessibility lawsuits, and the dramatic shift by consumers from brick-and-mortar stores to the Internet that will eventually culminate into the Marketplace Fairness Act of 2017 and Remote Transactions Parity Act of 2017.  

In Alabama, the Legislature concluded its 2017 session on May 19, 2017.  Six bills that threatened our industry failed to pass while three of the eighteen bills that our industry supported passed. The three that passed included Act No. 2017-380, Historic Tax Credit Bill; Act No. 2017-396, regulating the licensing of real estate brokers and salespersons; and, Act No. 2017-130, providing clarification to the procedure of excess funds from real estate tax sales. The bills that threatened our industry that failed to pass included “Doughnut Hole Annexation Legislation”; efforts to double the mortgage and deed recording fees and impose fees on the consumer; raising the mortgage recording fee from 15 cents per $100 of indebtedness to 30 cents per $100 of indebtedness; unitary combined reporting for business entities; and, a constitutional amendment to levy an additional five mill of state ad valorem tax with net proceeds to be distributed to the State General Fund for Medicaid purposes.

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A major part of commercial real estate investing is being aware of the current legislation and changes that could occur in the future. If you would like further information on these developments, or about CCIM, feel free to contact us.

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