On February 26, 2014, the House Ways & Means Committee under Chairman David Camp released a discussion draft Tax Reform Act of 2014. While tax reform almost certainly not going to happen in 2014, this draft proposal is significant in that it retains the Low-Income Housing Tax Credit Program, while eliminating virtually all other business tax credits. The importance of being included in the draft tax bill of the House cannot be overstated. While confidence has been high that the Senate would ultimately retain the LIHTC program, the position of Camps committee regarding the LIHTC has been in doubt. The inclusion of the LIHTC program in the Ways & Means draft bill provides a reason to be optimistic that when tax reform finally passes, the LIHTC program will be part of it. This speaks volumes about the success of the program, as well as the level of support it has in Congress and the hard work of the affordable housing industry. Not all tax credits fare as well in the draft bill. It repeals the historic rehabilitation tax credit, the renewable energy investment tax credit, and the production tax credit. It also does not renew the New Market Tax Credit, which expired at the end of 2013.   While the draft bill does retain the LIHTC program, it also makes major changes, which will significantly impact how the program operates. Changes in the program based on the draft bill are as follows:  

• The 4% credit is eliminated, as is the tax-exempt bond program. Interest on bonds issued after 2014 would be taxable, including those for multifamily housing projects. This essentially means that there would be no more tax credit for acquisition costs and no more automatic credits for tax-exempt financed projects.
• No more 130% basis boost for properties located in high cost areas and qualified census tracts. This change will result in more properties being awarded credits, but will make it more difficult to serve extremely low-income families and provide costly tenant services.
• There would be no more national pool of unused credits. Any states not allocating credits in two years would lose them.
• The floating rate for 9% credits would remain in place (i.e., no fixed 9% rate).
• The credit period would be extended from ten to 15 years, meaning there would be no more recapture, but the PV of the credits will also be reduced since acceleration of credit would no longer be permitted.
• A major change is that states would no longer allocate credits, but instead will allocate qualified basis. For example, instead of the current mechanism whereby a state allocates credits equal to $2.30 per capita or $2,665,000 (whichever is higher), states would allocate qualified basis in the higher amount of $31.20 per capita or $36,300,000. Over a 15-year period, this amount would be approximately the same present-value as 2014’s $2.30 per person in ten-year credits. Under the Camp proposal, the allocated qualified basis will be indexed annually based on inflation in increments of $.20 and $100,000 respectively.
• While not a change, the draft law makes clear that federal grants used to finance development costs will still not be includable in eligible basis.
• General public use requirements would be revised to eliminate the eligibility of housing set aside for persons identified by certain Federal or state programs and individuals involved in artistic & literary activities but would add veterans.
• States would no longer be required to include in their LIHTC selection criteria a preference for energy efficient projects and projects of historical significance.
• New York & Illinois would no longer be required to suballocate tax credits to Chicago and New York City

All these changes would be effective for calendar years after 2014, and there would be a transition rule ensuring that credit allocations made before 2015 would receive qualified basis allocations equivalent to the tax credit allocation they would have received notwithstanding the change in tax law.   The Joint Committee on Taxation (JCT) has estimated that the effect of these changes would save $10.7 billion over ten-years, most of which are the result of extending the tax credit period from ten to 15-years. A number of other proposals would impact real estate, including a proposal to extend the depreciable life of residential real estate from 27.5 years to 40 years. However, the annual depreciation would be increased based on inflation.   While the inclusion in the LIHTC program in this draft bill and the fact that the changes for the most part do not do serious damage to the program are very good news for our industry, keep in mind that there is virtually no chance for tax reform in 2014. House Speaker John Boehner has made no commitment to a vote on the Camp bill this year, and both Senate Majority Leader Harry Reid and Minority Leader Mitch McConnell have stated that no tax reform bill should be expected this year. Reinforcing this fact is the intent of Senate Finance Committee Chairman Ron Wyden to deal with expiring tax provisions in 2014. If tax reform was expected this year, there would be no reason to focus on these tax extenders.   The takeaway in all this is that 2014 will more than likely be just another year in the LIHTC program - the rules will be what they have been for years. However, 2015 may bring significant changes to the program, but it does appear that there will be a program. That, in and of itself, is terrific news for the affordable housing industry. Back to news