2017 Tax Reform Proposals -- Select Attributes Michael J. Tuchman 312.476.7550 mtuchman@lplegal.com

2017 TAX REFORM PROPOSALS – SELECT ATTRIBUTES TRUMP TAX PLAN1 HOUSE REPUBLICAN TAX REFORM PLAN2 Ordinary Rates (individual) Max 33% (over $225k joint). Earlier Trump proposal at 25%. Max 33% (over $441k joint). Capital Gain/Dividend Rate Max 20%. 50% exclusion (only half is taxed – 16.5% effective rate). Business Income Tax Rate New 15% corporate rate (now 35%). The 15% rate would also apply to all business income from sole proprietorships and pass- throughs. For “small businesses,” the 15% tax is “in lieu” of individual taxes. Otherwise it appears that distributed income will also be taxed at the 20% dividend rate (a combined 35% rate). Would real estate be a pass-through business? Unclear. New 20% corporate rate (now 35%). Tax “active” business income from pass- throughs at a maximum rate of 25%. This appears to be a true “in lieu” tax. There would be a reasonable compensation requirement for business income to identify the compensation component of business income that should be taxed at ordinary rates. Would real estate be an active pass-through business? Unclear. Taxes Repealed 3.8% investment income surtax (ACA). AMT (individual / corporate).   3.8% investment income surtax (ACA). Also repeals the 0.9% Medicare surtax. Carried Interests Taxed at ordinary rates (33%), but PE and hedge could qualify such income at the 15% rate on pass-through business income. Lack of clarity. Unclear generally, and unclear impact on real estate specifically. Varying provisions. None most recently. But note the small delta between new active business pass-through income rate (25%) and current capital gains tax rate (20%) eliminates much of the incentive for gaming. ___________________________________________ 1 October 2016. Proposals have varied dramatically over time. 2 July 2016. Proposals have varied dramatically over time.

HOUSE REPUBLICAN TAX REFORM PLAN ATTRIBUTE TRUMP TAX PLAN HOUSE REPUBLICAN TAX REFORM PLAN Other Attributes Eliminate/cap business interest deductions. Increased business expensing in lieu of depreciation. Elimination of many corporate tax expenditures (incentives). Increased individual standard deduction (to $30k joint). Limits itemized deductions other than mortgage interest and charitable contributions. 1031? Eliminate business interest deductions. Increased individual standard deduction (to $24k joint). Eliminates itemized deductions other than mortgage interest and charitable contributions. Wealth Transfer Taxes Repeal. Deemed sale treatment on capital gains of certain large estates (over $10 million joint). Repeal. Carry-over basis with limited step-up for modest estates. Tax Policy Center (Urban-Brookings Institute) Commentary on Trump Proposals TPC notes that numerous assumptions have been made as plan detail is lacking. Average household income tax reduction $3k, but skewed to highest earners. Average for top fifth is $16k; top 1% is $214k. Increased number of households paying no tax at all. Reduced Federal revenues of $6.2 trillion over 10 years. Substantial increases in deficits due to rate reductions ostensibly offset by increased tax revenues as a result of increased economic activity. Dramatic spending cuts needed to modulate deficit (projected to increase $7 trillion over 10 years even with additional tax revenues). Subject to deficit/inflation/interest rate risks, a significant plus for economic activity.