President Trump on Dec. 22 signed sweeping tax reforms that have significant impact on real estate interests, including real estate appraisers.
The full impact of the new law will take time to be felt, as the IRS will spend considerable time this year writing guidance. Shortly before the law took effect, AI wrote about major considerations
within the plan and hosted a webinar
outlining the potential impact on the real estate industry and valuation services. Additionally, one online summary
nicely covers major real estate impacts.
Whether appraisers themselves may take advantage of new provisions for pass-through entities, such as partnerships, S corporations and LLCs, the law allows pass-through firms to deduct 20 percent of certain business income, but the deduction phases out for service firms owned by single filers with income above $157,500 and for joint filers with income above $315,000. For taxpayers with incomes above certain thresholds, the 20 percent deduction is limited to the greater of A) 50 percent of the W-2 wages paid by the business or B) 25 percent of the W-2 wages paid by the business, plus 2.5 percent of the unadjusted basis, immediately after acquisition of depreciable property (structures, but not land).
The law clearly excludes certain personal service businesses from taking advantage of this tax benefit, including law and accounting firms owned by individuals who are phased out of the income thresholds noted above. Real estate valuation is not specifically included in the definition of personal service businesses.
“I would not, and have not, considered an appraiser as being in a personal services business, whether 269A, 448, or 441,” said Chris Hesse, CPA, principal, National Tax Office for CliftonLarsonAllen, LLP in Kennewick, Washington, about sections of the tax code addressing personal service corporations.
Hesse pointed out that a related question, specific to Section 199A, about whether an appraiser is providing a service described in Section 1202(e)(3)(A), which is defined as:
Any trade or business involving the performance of services in the fields of health, law,
engineering, architecture*, accounting, actuarial science, performing arts, consulting, athletics, financial services, brokerage services, or any trade or business where the principal asset of such trade or business is the reputation or skill of 1 or more of its employees.
*Engineering and architecture firms were excluded from the definition of personal service businesses under the new law and therefore able to receive the new pass-through entity tax benefit.
Hesse indicated that appraisers most likely are not excluded from Section 199A, the Qualified Business Income Deduction.
“The appraiser is providing a research service to investigate how a property might be valued in an independent transaction,” Hesse explains. “Perhaps a client seeks out a specific appraiser due to that appraiser’s reputation, but the principal asset used by the appraiser is the database of real estate values on which the research is performed.”
“A more skilled appraiser may arrive at a more credible result, but is that an asset of the business or of the individual?” Hesse posits. “There are any number of businesses that rely on the reputation of the owner or key employees for providing a beneficial result for customers — we call that goodwill — but that does not make them a specified service described in Section 1202(e)(3)(A).”
Real estate appraisers and valuation firms are encouraged to seek the assistance of tax professionals in evaluating the potential impacts of the new law on their business.
The Senate Banking Committee on Dec. 18 passed S 2155, the Economic Growth, Regulatory Relief, and Consumer Protection Act
, legislation that eases bank regulations instituted after the 2008 financial crisis. Community banks, particularly those in rural areas, were especially vocal about their concerns over regulation. The bill passed with bipartisan support.
The legislation contains a provision that exempts appraisals if the loan originator has contacted at least three state-licensed or state-certified appraisers within a “reasonable amount of time” without successfully finding someone to perform the appraisal. This provision stems from concerns expressed by lawmakers in the Dakotas who have heard complaints from financial institutions about long delays and/or access to appraisers.
The Appraisal Institute is working with the legislators behind the provision to tighten the language so it cannot be exploited by originators looking for a way to avoid ordering appraisals. AI also is reviewing the reasons behind any possible appraiser shortages.
A vote by the full Senate has not been scheduled yet, but it may see floor action in the first quarter of 2018.
President Trump on Dec. 22 authorized a short extension of the National Flood Insurance Program, which Congress has struggled to reform. In November, the House passed HR 2874
, legislation that makes holistic changes to the NFIP, but the Senate, which has seen several such proposals, has yet to act.
Action is expected this year, however, as both the House and Senate understand that the NFIP, which has been significantly stressed due to multiple natural disasters, needs to improve its financial management, especially after the federal government in October forgave $16 billion of program debt.
The House and Senate differ on several key issues, including limits on premium increases for policyholders, the role of private insurers in flood markets, funding levels for flood mitigation programs and coverage restrictions for structures that repeatedly flood.
Changes included in the House bill would impact the real estate market and the valuation profession. Broadly, the bill revises the NFIP community rating program to require the Federal Emergency Management Agency to provide premium credits in communities that protect natural and beneficial floodplain functions.
The bill stresses FEMA’s duty to disclose to the policy holder the property’s full flood risk, which could heighten the importance of including flood maps and the flood map description in appraisal reports, according to Patricia E. Staebler, SRA, of Bradenton, Florida, who specializes in flood valuation issues.
“I still see too many reports without the flood map or lack of updated flood map, which can be a liability for appraisers for lack of disclosing flood risk or even multiple loss properties,” Staebler noted. The bill also amplifies the importance of the Community Rating Systems, which Staebler said would increase the utilization of 50 percent FEMA appraisals.
Additionally, the bill revises NFIP coverage for:
Properties that have incurred multiple flood losses;
Properties that have exceeded specified levels of claim payments; and
Certain high-risk properties.
Properties that have incurred multiple flood losses would be reclassified under the bill, and FEMA would be required to annually raise premiums by at least 15 percent if the premiums do not reflect full risk; certain multiple loss properties would be subject to minimum deductibles. Additionally, FEMA would be required to deny coverage to property owners who do not implement flood mitigation measures if the property is an extreme repetitive loss property, defined as a property with cumulative claims that exceed 150 percent of the maximum coverage amount. Multiple loss properties would be ineligible for subsidized premium rates that apply to properties newly mapped into areas with special flood hazards. Further, the bill would eliminate NFIP coverage for properties that prospectively exceed specified lifetime levels of claim payments. The bill would limit the availability of NFIP coverage for high-risk properties, including new structures built in a special flood hazard zone and structures with high replacement costs.
HR 4459 was introduced by Rep. Mike Thompson, D-Calif., and Rep. Mike Kelly, R-Pa, to prohibit partnerships from taking conservation easement deductions where the aggregate amount is 2.5 times the partner’s adjusted basis within the first five years of the partnership. The bill is endorsed by the Land Trust Alliance and several other conservation organizations that are concerned about the way potential abuse can affect conservation efforts. The Appraisal Institute’s Government Relations Committee is reviewing the bill.
A rider was included in last year’s House appropriations bill for the IRS to prohibit the agency from enforcing the notice listing syndicated conservation easement transactions. No action has been taken on it in the Senate, so the IRS continues to enforce the notice. HR 4459 was referred to the House Ways and Means Committee for review.
The Appraisal Institute this fall signed onto two important initiatives impacting the real estate industry, the first being an industry letter supporting full funding of the 2020 U.S. Census and the second being a partnership with the Land and Water Conservation Fund Coalition.
AI on Dec. 14 joined the National Association of Home Builders, the National Association of Realtors, the National Multifamily Housing Council and eight other real estate groups in co-signing an industry support letter
advocating for full funding of the U.S. Census.
“While there are many private data providers that are used in concert with census data, the Decennial Census and the American Community Survey remain the most reliable sources of data in many locations, especially in rural communities,” the letter stated.
The letter further noted, “The ACS is the only source of objective, consistent and comprehensive information about the nation’s social, economic and demographic characteristics down to the neighborhood level. Since the introduction of the ACS in the mid-2000s, census data have been even more reliable in terms of picking up large changes in the U.S. economy.”
The second initiative involved AI becoming a partner of the Land and Water Conservation Fund Coalition
on Twitter) following a request for support at the 2017 Land Trust Alliance Rally Oct. 26-28 in Denver. The LWCF Coalition supports the permanent reauthorization and the full funding of the LWCF, which is the largest source of federal funding for the conservation of national parks, forests, wildlife refuges, wilderness, civil war battlefields, working lands and state and local parks.
The Federal Housing Administration announced Dec. 7 that it would stop issuing mortgages on properties that include Property Assessed Clean Energy assessments. The decision is part of a broader effort to protect the agency’s Single-Family Mutual Mortgage Insurance Fund, which has a net worth of $25.6 billion.
The FHA, which began insuring mortgages with PACE assessments in July 2016, also noted concerns regarding property overvaluation, stating in its announcement
, “The existence of FHA-insured financing for properties with PACE assessments creates additional choices for financing options, potential borrowers may face risk associated with the potential for property overvaluation due to the unknown or miscalculated effect of the PACE lien on the property value.”
Sen. Jerry Moran, R-Kan., and Rep. Scott Tipton, R-Colo., on Dec. 14 reintroduced a revised version of S 2237, the Financial Institutions Examination Fairness and Reform Act
, legislation that promotes consistency in bank examinations and due process and enhances consistency in the interpretation and understanding of bank examination guidelines and regulations.
The legislation was first introduced in 2012, and the Appraisal Institute has had from the start concerns with a provision that could unnecessarily hinder bank examiners from protecting safety and soundness by prohibiting the reappraisal of a performing loan — even if examiners identified safety and soundness concerns.
The reintroduced bill no longer contains that provision, and instead calls for an Office of Independent Examination Review to investigate complaints from financial institutions concerning examination practices and to review examination procedures and ensure they are being followed.