On Wednesday, February 27 the House Ways and Means Committee Chairman Dave Camp released a discussion draft of his Tax Reform Act of 2014. Section 3204 of this draft bill includes major changes to the LIHTC program (among other things, it eliminates the 4% credit). The verbatim explanation of the LIHTC changes from the committees section-by-section analysis are provided below. Private activity bonds are also affected. Under the provisions of Sections. 3431-3432, interest on newly issued PABs would be taxable. Additionally, no Federal tax credits would be allowed for mortgage credit certificates issued after 2014. The provisions would be effective for bonds issued after 2014 with regard to PABs and tax years ending after 2014 with regard to mortgage credit certificates. Section 3621, Ordinary Income Treatment in the Case of Partnership Interests Held in Connection with Performance of Services, treats carried interest income as ordinary income rather than a capital gain. However, the section-by-section states, The provision would not apply to a partnership engaged in a real property trade or business.
The complete Section-by-Section analysis of the draft bill is available here.
The Ways and Means Committee is inviting feedback on the draft bill. NAHMA will prepare our comments in consultation with our Tax Credit Committee. Please know that we will strongly oppose provisions which would inhibit use of the LIHTC for preservation of affordable housing.
If you would like to offer comments for consideration, please email them to me by March 7 if possible. Examples of the 4% credits important role in preservation would be especially helpful. This legislation will also be a subject for discussion at our upcoming Winter Membership Meeting.
Excerpt from Sec. 3204. Low-income housing tax credit:
Provision: Under the provision, the LIHTC would be modified in several ways.
Allocation of basis: Under the provision, State and local housing authorities would allocate qualified basis, rather than credit amounts. The annual amount of allocable basis for each State would be equal to $31.20 multiplied by the States population, with a minimum annual amount of $36,300,000. The annual amount would continue to include unused basis allocations from the prior year plus basis allocations returned to the State during the calendar year from previous allocations. The national pool of unused credits, however, would be eliminated.
Credit period: Under the provision, the credit period would be extended from 10 years to 15 years to match the current 15-year compliance period. Because the credit period would be aligned with the compliance period, the recapture rules also would be repealed as no longer necessary to ensure that the building continues to be a low-income housing project for the
duration of the tax benefit.
Credit amount: Under the provision, the 4-percent credit would be repealed. The 9-percent credit for newly constructed property and substantial rehabilitations would be retained. In addition, Federally funded grants would not be taken into account in determining the eligible basis of a building for purposes of the credit. As a result, the credit would apply to private funding of low-income housing and not provide an additional subsidy for Federal funding of such projects. The amount of the credit would continue to equal the qualified basis in the qualified low-income building multiplied by the applicable percentage. Under the provision, the IRS would determine the applicable percentage generally for the month that the building is placed in service, which would be equal to the percentage that would yield over a 15-year period a credit amount that would have a present value equal to 70 percent of the qualified basis of the building.
Other changes: Under the provision, several other rules would be modified. First, the increased basis rule for high-cost and difficult development areas would be repealed. Second, the general-public-use requirement would be revised to eliminate the special occupancy preference for members of specific groups under certain Federal or State programs and the special preference for individuals involved in artistic and literary activities. Instead, occupancy preferences would only be permitted for individuals with special needs and for veterans. Third, the provision would repeal the requirement that States include in their low-income-housing selection criteria the energy efficiency of the project and the historic nature of the project.
The provision would be effective for State basis amounts and allocations of such amounts determined for calendar years after 2014. A transition rule would translate credit allocations prior to 2015 into equivalent amounts of eligible basis for purposes of determining new allocations of basis after 2014.
· The LIHTC provides an important private-sector alternative to Federally financed and operated housing for low-income individuals (e.g., Section 8 housing).
· According to the non-partisan Joint Committee on Taxation (JCT), the provision would increase the amount of LIHTC-financed projects by more than 5 percent in 2015 (from $9.3 billion to $9.8 billion), while reducing the cost to taxpayers.
· By modernizing the credit, the provision would provide a more transparent benefit by permitting States to allocate the basis that supports low-income housing units.
· The provision also would align the credit period with the current 15-year compliance period to ensure that the housing project continues to meet its low-income purpose for the duration of the tax benefit.
· The provision would simplify the current credit, which is the longest section of the Code today, by streamlining many complex provisions and eliminating several special rules.
JCT estimate: According to JCT, the provision would increase revenues by $10.7 billion over 2014-2023.