Congress adopted on July 26 major changes in the housing tax credit program as part of the Housing and Recovery Act of 2008. The President signed the bill on July 30, 2008 (the "Effective Date"). The following is a summary of the major changes.
More Credits in 2008 and 2009
The per capita credit amount was increased by 20 cents for 2008 and 2009. Since most states already allocated all of the credits for 2008, this will mean that states need to develop methods for allocating the additional 2008 and 2009 credits. Round 2 may be increased to include the additional 2008 credits. The small state minimum credit is increased by 10% in 2008 and 2009.
The 9% Credit Is Really the 9% Credit (until 2013)
Non-federally subsidized new buildings (including qualified rehabilitation that is a "new building" for tax purposes) will be eligible for a 9% credit. This applies to buildings placed in service after the Effective Date—and before December 31, 2013. The 4% (30% present value) credit continues to float.
Definition of "Federally Subsidized" Is Limited
A building will now be classified as federally subsidized (and only eligible for the 4% credit) if it is financed with tax-exempt bonds. Below-market federal loans (HOME, CDBG, NAHASDA, etc.) will no longer cause a project to be treated as federally subsidized. This applies to projects placed in service after the effective date.
Basis Boost for Additional Projects
A credit allocator may now award the 30% basis boost to buildings that need the boost to be financially feasible. The building need not be located in a QCT or DDA. This does not apply to bond-financed projects.
Federal Grants for Operation No Longer Reduce Basis
The eligible basis of a building shall not include the proceeds of a federally funded grant. This change deletes the references to grants "for the operation" of the building. As a result, SHP, IRP payments and other federal operating subsidies should not reduce basis.
Section 8 Mod Rehab No Longer Kills a Deal
Buildings receiving Section 8 mod rehab assistance may now receive tax credit allocations. This is effective for buildings placed in service after the date of enactment.
General Public Use Rules Modified
The new law clarifies that the general public use requirement is not violated as a result of occupancy restrictions or preferences that favor tenants:
- with special needs;
- who are members of a specified group under a Federal
Program or State program or policy that supports housing for
such a specified group; or
- who are involved in artistic or literary
activities.
This should eliminate recent concerns about housing with preferences for artists, farmworkers and Native Americans. This applies "before, on and after" the effective date.
Repeal of Alternative Minimum Tax
Low-income housing tax credits may now offset alternative minimum tax (AMT) liability. This change should open up the tax credit investment market to additional investors. This applies to buildings placed in service after December 31, 2007. Interest on multifamily housing bonds is now also exempt from AMT.
Additional Substantial Rehabilitation Required
Rehabilitation expenditures must now equal the greater of $6,000 per unit or 20% of the adjusted basis of the building being rehabbed. This applies to projects which receive a credit allocation after the date of enactment. The $6,000 is adjusted annually for inflation.
More Credits for Community Service Facilities
A community service facility may now constitute 25% of the first $15,000,000 of a building's eligible basis and 10% of the eligible basis over $15,000,000. Note, inclusion of these facilities in eligible basis still only applies in QCTs. This applies to buildings placed in service after the date of enactment.
Ten-Year Hold Requirement Eliminated for Certain Subsidized Buildings
The 10-year hold is no longer required to claim acquisition credit on buildings subsidized pursuant to certain specified HUD and USDA housing programs and similar state assisted programs. This is effective for buildings placed in service after date of enactment. Programs included are HUD Section 8, Section 221(d)(3), Section 221(d)(4), Section 236, and USDA Section 515 and any other housing program administered by HUD or the Rural Housing Service of the Department of Agriculture.
Related Person Rule Relaxed for Acquisition Credit
Two persons (or entities) are now related if they own more than 50% of the capital interest or profits in each entity. The 50% replaces 10% in the prior law. This is effective for buildings placed in service after the date of enactment.
Timing of Carryover Allocation Modified
A building must incur 10% of the taxpayer's reasonably expected basis within 12 months (previously 6 months) of when an allocation is made. The building must still be placed in service before the close of the second calendar year following the year of allocation.
Recapture Bonds Eliminated
The requirement for a recapture bond is eliminated for all dispositions after the effective date. There is now an extended statute of limitations that extends three years following a recapture event. In addition, taxpayers may elect to eliminate the bond for past dispositions if it is reasonably expected that the building will continue to be a qualified low-income building and the taxpayer agrees to the new longer statute of limitations.
Students Previously in Foster Care Eligible
Students previously under the care and placement responsibility of a foster care program (Part B on E of Title IV of the Social Security Act) now qualify for occupancy in tax credit programs.
Change in Income Limits for Rural Areas
For projects receiving tax credit allocations (not bond financed projects), the income limits are based on the greater of the: (1) applicable area median gross income, or (2) the national non-metropolitan median gross income.
Coordination of LIHTC and Bond-Financed Transactions
Certain changes were made to make the rules for projects financed with tax-exempt bonds consistent with the tax credit rules. These include changes to the next available unit rule, students and SRO units and annual recertification for 100% low-income projects.
This summary only highlights the major changes and does not cover all of the changes made by the Housing and Economic Recovery Act of 2008.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
