News

Comparison of House and Senate Tax Bills

On November 9, the Senate Finance Committee released its tax plan, following the House Ways and Means Committee plan last week. Since I sent a memo on the House plan last week, I will only note the differences between the two plans in this memo.   The House Plan has four tax brackets (12%, 25%, 35%, and 39.6%). The Senate proposal has seven - all of which are lower than the current rates (10%, 12%, 22.5%, 25%, 32.5%, 35%, and 38.5%);   The House plan increases the child tax credit from $1,000 to $1,600 and the Senate bill proposes $1,650;   Both plans reduce the corporate tax rate to 20%, but the House bill makes the reduction in 2018 while the Senate delays the cut until 2019;   The House doubles the current exemption on the estate tax to apply only to estates worth more than $10 million in 2018 and phases the cut out over six years. The Senate doubles the exemption next year and but keeps the tax in place;   The House plan cuts deductions for major medical expenses by allowing a deduction only when expenses exceed 10% of income; the Senate keeps the deduction in place;   The House bill only permits a mortgage interest deduction on the first $500,000 borrowed for a primary home and allows no deduction for second homes or home equity loans; the Senate keeps the current limit of $1 million but ends the deduction for home equity loans;   House allows deduction of property taxes up to $10,000 but the Senate eliminates all state and local tax deductions;   The House bill eliminates a deduction for interest on student loans but the Senate bill allows the deduction; and   The House bill eliminates the deduction for the cost of class materials purchased by teachers from their own funds but the Senate leaves this deduction in place.   Also, critical to affordable housing, while the House Bill proposes to eliminate tax-exempt bonds, the Senate leaves the program intact.   The House and Senate must both complete "mark up" of the current plans and each must vote on a full bill. Since the two bills will have significant differences, a conference will be required between the two chambers to come up with a final bill, at which point it will go to the President for signature.   While not a sure thing, the plan is to have a bill for the President before Christmas.

Tax Cuts and Jobs Act - H.R 1

On November 2, 2017, the House Ways & Means Committee released H.R.1, "The Tax Cuts & Jobs Act." The 429-page bill includes five sections: Tax Reform for Individuals; Repeal of the Alternative Minimum Tax (AMT); Business Tax Reform; Taxation of Foreign Income; and Exempt Organizations   While all five sections are important and have far-reaching impact, this memo deals primarily with the first three, since these are the most likely to impact our clients.   This proposed legislation is simply the beginning of a long process. It is certain that when (if) a tax bill is signed into law (this year or sometime in the future), it will differ from what is currently included in H.R. 1.   Major Elements of the Tax Cuts & Jobs Act   The Mortgage Interest Deduction is capped at $500,000 of debt for future purchases of principal homes. This would not apply to people who currently own first and second homes. There would be four tax brackets under the new law: Income of $24,000 or less: no tax; Income of $24,001 - $90,000: 12%; Income of $90,001 - 260,000: 25%; Income of 260,001 - $1,000,000: 35%; and Income of more than $1,000,000: 39.6% The standard deduction would be increased to $24,400 for married couples and $12,200 for individuals. There would be no change from current law for the treatment of 401k plans. There would be a significant reduction in medical expense deductions (as noted below). Deductions for property tax would be capped at $10,000, with no deduction for other state or local taxes. The bill repeals the Alternative Minimum Tax (AMT). This will result in huge savings for persons with very high incomes. Only 60% of charitable contributions would be deductible, but non-deducted contributions could be carried forward for five years. There would be no deduction for contributions to medical savings accounts and amounts contributed by the employer will be taxable to the employee. Historic Tax-Credits would be repealed. The New Market Tax Credit would be repealed. Private Activity Bonds (Tax-exempt bonds) would be terminated.   As currently proposed, the tax changes would result in a significant reduction in the number of affordable housing units developed over the next ten years (some estimates are as high as one million units). The primary drivers of this reduction are (1) the 20% corporate tax rate; and (2) elimination of tax-exempt bonds. The repeal of Historic Tax Credits and to a lesser degree the New Market Tax Credits will also impact the number of affordable housing units.   There are less publicized areas of the bill that will impact a fairly substantial number of people. These are worth mentioning:   Adoption tax credits of up to $13,750 per child will end; For divorce decrees issued after 2017, alimony will no longer be deductible for the person paying, but will not be counted in the income of the recipient; Teachers will no longer be able to deduct the cost of school supplies they purchase with their own money; Under current law, losses from theft or natural disasters that exceed 10% of adjusted gross income are deductible. This bill repeals that deduction except for disasters given special treatment by a prior act of Congress, such as losses from Harvey, Irma, and Maria (which was sponsored by Rep, Kevin Brady (R-Texas), who just happens to be the chairman of the House Ways and Means Committee, and is the primary author of the bill); Cash awards from employers to employees for employee achievement awards will no longer be deductible; Under current law, major medical costs exceeding 7.5% of adjusted gross income are deductible; this is repealed under the bill; The cost of moving expenses for a new job more than 50 miles from a current home is no longer deductible; Companies will no longer be able to claim a credit of 25% of the expenses for employee childcare; A credit for 50% of the cost of clinical testing of drugs for rare diseases and conditions would be repealed; Interest on the bonds issued by State and local governments for sports stadiums will no longer be tax-free; and Tax preparation fees will no longer be deductible.   The bill makes no mention of the Low-Income Housing Tax Credit (LIHTC). This is good, in that it leaves the program as it currently exists untouched. But, as noted above, the lowering of the corporate tax rate will have a market-driven impact on LIHTC housing, and elimination of the tax-exempt bond program would be devastating. Anyone who believes that the development of affordable rental housing is important should contact their elected representatives and make it clear that the elimination of Tax-Exempt Bonds and Historic Tax Credits will have an unacceptable impact on the availability of affordable housing.

2018 Operating Cost Adjustment Factors (OCAFs) and Utility Allowance Factors Released by HUD

On November 2, 2017, HUD published the Operating Cost Adjustment Factors (OCAF) in the Federal Register. These factors are used for adjusting or establishing Section 8 rents under the Multifamily Assisted Housing Reform and Affordability Act of 1997 (MAHRA), as amended, for projects assisted with Section 8 Housing Assistance Payments. The factors are effective February 11, 2018 and can be found at www.gpo.gov/fdsys/pkg/FR-2017-11-02/pdf/2017-23901.pdf.   OCAFs are distinct from, and do not apply to the same properties as Annual Adjustment Factors (AAFs). AAFs are used to adjust contract rents for units assisted in certain Section 8 housing assistance payment programs during the initial (i.e., pre-renewal) term of the HAP contract and for all units in the Project-Based Certificate Program.   The OCAFs are published for each state and range from a low of 0.9 for Hawaii and the Pacific Islands to a high of 2.9 for Alaska.   Utility Allowance Factors for 2018, which may be used to adjust baseline utility allowances prepared in accordance with Housing Notice 2015-04, are also now available on HUDUser at www.huduser.gov/portal/datasets/muaf.html.    

Financing for Multifamily Energy Conservation Improvements - the PACE Program

A number of states and the District of Columbia have enacted legislation authorizing Property Assessed Clean Energy (PACE) programs to finance the installation of energy conservation improvements on multifamily housing projects. HUD has established standards for determining whether such programs are compatible with FHA and subsidized housing programs and guidance for obtaining HUD approval for participation in PACE programs.   PACE programs typically allow owners to finance the up-front costs of the installation of energy conservation improvements by entering into a contract with the participating locality providing that the costs will be repaid through special property assessments, generally through semiannual payments over 20-years. Under the HUD guidance, a PACE program will be approved only if the special assessment will be assessed by a state, county, or municipality under state law and sent with tax bills; payments will be collected with tax bills; at any given time, the owner s only obligation will be the payment or payments then or past due, with no acceleration of the entire assessment amount; and in the event of a default on payment of the PACE assessment, the mortgagee will receive timely notice and a reasonable opportunity to cure the nonpayment.   Once a local PACE program has received notice that it satisfies HUD s procedures, HUD will consider requests from project owners to participate in the program.   States with active residential PACE programs are Florida, Missouri, and California. There are also a number of states with enabling legislation but no actively operating PACE programs. These are: Maine Rhode Island New York Vermont New Jersey Maryland Ohio Michigan Wisconsin Minnesota Illinois Georgia Arkansas Oklahoma Nebraska Colorado New Mexico Nevada Oregon   Owners of HUD-assisted projects interested in possible participation in a PACE program should obtain and review a copy of HUD Notice H 2017-01 dated January 11, 2017.   Owners of non-HUD-assisted properties are also eligible to participate in local PACE programs, including Low-Income Housing Tax Credit properties. Owners of properties located in the states noted above that are interested in possible PACE participation should contact their locality for details.    

Rural Housing Service Final Rule on Financial Reporting Requirements

On October 25, 2017, the Rural Housing Service (RHS) published a Final Rule in the Federal Register, "Multi-Family Housing Program Requirements to Reduce Financial Reporting Requirements." This rule is effective on November 24, 2017.   The purpose of this rule is to align RHS requirements with those of the Department of Housing and Urban Development (HUD) with regard to the financial reporting requirements of federally assisted housing projects. The rule will utilize a "risk-based threshold" reporting which is intended to reduce the burden on owners of smaller properties.   Programs affected by this rule are the Farm Labor Housing Loans and Grants (Section 514 and 516) and the Rural Rental Housing Program (Section 515).   Background   RHS believes that high-risk properties should receive more stringent evaluation of financial performance and that such evaluation can be accomplished in a more cost-effective manner than the current requirements. This new rule will also meet HUD requirements so that RHS properties with HUD Section 8 will now have uniform financial reporting requirements.   High-risk properties are those with combined federal financial assistance of $750,000 or more for non-profit entities and $500,000 or more for for-profit entities. The new rule also requires that all owners of RHS properties use the accrual method of accounting, regardless of the size of the projects, and must describe their accounting, bookkeeping, budget preparation, and financial reporting procedures in the property management plan.   Annual Financial Reports   For-profit borrowers that receive $500,000 or more in combined Federal financial assistance must include an independent auditor s report that complies with generally accepted accounting principles (GAAP).   Non-profit borrowers that receive $750,000 or more in combined Federal financial assistance must meet Federal Audit requirements relating to non-profit reporting.   Non-profit borrowers that receive less than $750,000 and for-profit entities that receive less than $500,000 in combined Federal financial assistance will submit annual owner certified prescribed forms on the accrual method of accounting. Borrowers may (but are not required to) use a CPA to prepare this compilation report of the prescribed forms. The required submission will include: A statement that there has been no change in project ownership other than those approved by the Agency and identified in the certification; Documentation that real estate taxes are paid in accordance with state and/or local requirements and are current; and Documentation that replacement reserve accounts have been used for only authorized purposes.   While this rule is effective on November 24, 2017, it will essentially be effective for borrowers with fiscal years beginning January 1, 2018 and thereafter.

HUD Revision to Effective Date for 2015 DDA and QCT Designations

On October 26, 2017, HUD published a notice in the Federal Register, "Statutorily Mandated Designation of Difficult Development Areas and Qualified Census Tracts: Revision of Effective Date for 2015 Designations."   This notice revises the effective date for designations of "Difficult Development Areas" (DDAs) and "Qualified Census Tracts" (QCTs) for purposes of the Low-Income Housing Tax Credit (LIHTC) in areas that were declared a federal disaster area under the Stafford Act. This Notice extends from 730 days to 850 days the period for which the 2015 lists of QCTs and DDAs are effective for projects located in the disaster areas. The Notice does not apply to QCTs or DDAs that were on a subsequent list of DDAs or QCTs and only applies to applications that were submitted while the area was a 2015 QCT or DDA.   HUD is revising the effective date of the 2015 QCTs and DDAs in declared counties to aid the ability of areas affected by natural disasters to place in service affordable housing.   Effective Date   The 2015 lists of QCTs or DDAs are effective: For allocations of credit after December 31, 2014; or For properties with bond issues under IRC 42(h)(4), if the bonds were issued and the building is placed in service after December 31, 2014.   If an area is not on a subsequent list of DDAs, the 2015 lists are effective for the area if: The allocation of credit to an applicant is made no later than the end of the 850-day period after the applicant submits a complete application to the credit allocating agency, and the submission is made before the effective date of the subsequent lists; or For properties with bond issues under IRC 42(h)(4), if: The bonds are issued or the building is placed in service no later than the end of the 850-day period after the applicant submits a complete application to the bond-issuing agency, and The submission is made before the effective date of the subsequent lists, provided that both the issuance of the bonds and the placement in service of the building occur after the application is submitted.   DDAs and QCTs for 2016 were published on November 24, 2015; DDAs and QCTs For 2017 were published on October 17, 2016; and DDAs and QCTs for 2018 were published on September 11, 2017.   In the case of a "multiphase project," the DDA or QCT status of the site of the project that applies for all phases of the project is that which applied when the project received its first allocation of LIHTC.   A "multiphase project" must meet the following criteria:   The multiphase composition of the project was made known by the applicant in the first application of credit for any building in the project, and the applicant identified the buildings in the project for which credit is or will be sought; The aggregate amount of LIHTC applies for exceeds the one-year limitation on credits per applicant imposed by the allocating agency, and this limitation is the reason the applicant must request multiple allocations over two or more years; and All applications for LIHTC for the project are made in immediately consecutive years.   Following are two examples of the how the effective date determination works:   Project A is located in a 2015 DDA that was NOT a designated DDA in 2016, 2017, or 2018 and is in a declared federal disaster area. >A complete LIHTC application was filed on November 15, 2015. >Credits are allocated to the project on January 30, 2018 (807 days after the LIHTC application). >Project A is eligible for the increase in eligible basis for a project located in a 2015 DDA because the application was filed BEFORE January 1, 2016 (the effective date for the 2016 DDA list), and because tax credits were allocated no later than the end of the 850-day period after the filing of the complete LIHTC application. Project B is located in a 2015 DDA that is NOT a designated DDA in 2016, 2017, or 2018 and is in a declared federal disaster area. >A complete LIHTC application was filed on December 1, 2015. >Credits are allocated to the project on June 30, 2018 (942 days after the LIHTC application). >Project B is NOT eligible for the increase in basis because, although the LIHTC application was filed before January 1, 2016 (the effective date of the 2016 DDA lists), the credits were allocated later than the end of the 850-day period after the filing of the complete application.   This Notice affects only owners of LIHTC properties that are:   Located in an area that was in a DDA or QCT in 2015, but not in 2016, 2017, or 2018; and Are in a federally declared disaster area.

The Importance of a Fair Housing Code of Conduct for Site Staff

No matter how large or small a property is, there will always be staff assigned to do work at the property, including maintenance and leasing staff. While all staff receive training relating to their job, there is one type of training that is necessary for everyone - Fair Housing. Many management company owners and supervisors overlook the importance of having specific fair housing policies for a property s maintenance staff.   If a company fails to provide fair housing training for its staff and a resident believes that a maintenance workers conduct violated fair housing law, the owner of the property may face a much stiffer penalty than would occur if fair housing training had been provided. In addition to training, establishing a fair housing code of conduct for property-based staff, including maintenance staff. Having a Code of Conduct, and training all staff on the requirements of the policy, can go a long way toward preventing fair housing claims against a property - especially in the area of sexual harassment.   While education is a crucial part of the fair housing process, instructing staff about fair housing law is not enough because that won t necessarily teach them exactly how they are expected to behave when interacting with residents and prospects. A Code of Conduct for staff authorized to enter resident units should include specific rules, with examples. While the rules cannot cover every possible scenario, they should describe the most common mistakes and how to avoid making them.   Any Code of Conduct for site staff should cover six basic rules:   Treat all prospects and residents in the same manner; Don t fraternize with residents; Don t enter a unit unless a resident lets you in; Don t be alone in a unit with a minor child; Respect residents privacy; and Enter units in a team for emergency service when the resident is not at home.   Having a Code of Conduct with these elements will go a long way in helping to prevent avoidable fair housing complaints. If we can assist you in any way in establishing such a policy for your property, please feel free to contact us.    

Tax Reform Update - October 22, 2017

Last Thursday, October 19, Congressional Republicans in the Senate approved a budget resolution for the 2018 fiscal year. This is the first in a long line of hurdles that must be overcome for there to be a tax bill this year. Congressional Republicans hope to have a tax bill signed into law by Christmas, but the road in front of them is laden with traps and potential roadblocks. This is especially true in the Senate, where Republicans can only afford to lose two votes if they want to pass a bill without Democratic help. Here is my take on some of the issues facing a 2017 passage.   Timing House and Senate Republicans have each approved budgets, but they differ significantly over how much of an increase in the deficit will be permitted over the next ten years. This decision alone could take weeks have negotiation in a formal conference committee. One way the bill could move faster is if the House just approves the Senate version, which could happen before the end of October.   How Comprehensive will a Final Bill Be? The nine-page tax plan "framework" that was released a few weeks ago includes targets for reductions in both corporate and individual tax rates. Unfortunately, the devil is in the details and there were virtually no details. The next major step in the process will be draft legislation from the House Ways and Means Committee, which could turn the nine-page framework into a thousand pages of legislation. I would expect the draft to come out of the House by early November (any later will make it very difficult to get anything done this year). Republican members of Ways and Means will be meeting during the week of October 23 to work on final details. The Senate Finance Committee will then release it s version, which is likely to have some significant differences from the House bill - especially with regard to international business taxation.   The Democrats Role Once Ways and Means presents a bill, committee members will have a chance to mark it up. This is a process whereby representatives may offer amendments, and Democrats try to push the bill toward more cuts for the middle class, primarily by expanding the earned-income tax credit. Republican members will also offer amendments, including protection for taxpayers in high-tax states who claim large deductions for state and local taxes, which are eliminated in the Framework. Each amendment must be voted on and may be approved by a simple majority. Once the bill clears committed, the same process will play itself out on the House Floor, with the process repeating itself in the Senate.   What Happens Then? The bill will be moved under a mechanism called "reconciliation," which will allow Republicans to pass the bill for no Democratic votes - only a simple majority will be needed, or, since Vice-President Pence is the Senate tiebreaker, 50 votes in the Senate. However, to proceed under Reconciliation, the bill must not increase deficits by more than the amount allowed in the budget resolution - $1.5 trillion over ten years in the Senate version - and it must not add to the budget deficit in the next decade. The only way these deficit goals can be met is if games are played with some of the proposed cuts. For example, some of the cuts may be set to expire after a few years and other cuts could be phased in over time. Of course, the majority could just ignore the analysis of the Congressional Budget Office and the Joint Committee on Taxation and just rely on a more favorable analysis of the bill from the White House or elsewhere. Such a step would almost certainly result in a bitter fight over the bill, which could make it impossible to pass this year. Even if both the House and Senate pass bills, they will likely have large differences. These will have to be worked out in Conference. Once the differences are worked out, a final bill will be sent to the President for signature. At this point, there is no reason to believe that the Low-Income Housing Tax Credit will not be part of a final bill, but until its done, housing advocates need to continue to push their representatives on the importance of the program.