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Changes to the Federal Low Income Housing Tax Credit Program
This Legislative Update highlights the new federal low-income housing tax credit rules in The Housing and Economic Recovery Act of 2008 (the Act), enacted on July 30, 2008. Please note that this summary does not contain an exhaustive list of the new provisions, nor is the discussion of each provision comprehensive.
Increase in Amount of Credits Available to Each State
In the years 2008 and 2009, the volume cap of the credit for each state (on a per person basis) is increased from $2.00 to $2.20. The minimum amount allocable by each state (applicable to smaller states) is also increased by 10%. In 2010, the volume cap returns to its previous limits. State housing agencies are expected to clarify in the near future how the additional credits will be awarded, including whether the additional credits will be awarded to (i) projects which have already received an allocation but which could increase their feasibility by using more credits, (ii) new projects which have not been awarded credits to date or (iii) a combination of both.
9% Applicable Percentage for New Buildings
The applicable percentage for any new building that is not federally subsidized (see next paragraph) will be at least 9%. This rule applies to all buildings placed in service between July 31, 2008 and December 31, 2013. Taxpayers who have locked in a rate below 9% prior to July 31, 2008, will presumably have an automatic rate change to 9% if their building is placed in service after July 30, 2008. However, the Act does not specifically state that the 9% rate supersedes a previously locked-in rate, and the IRS has not provided additional guidance to date. If the application of a 9% rate results in additional credits above the amount previously allocated, the taxpayer would have to apply to the state allocating agency for the additional credits. Existing buildings and buildings financed with tax-exempt, volume cap bonds would continue to receive the variable 4% credit. For August 2008, this rate is 3.40%
Below Market Federal Loans Allowed With 9% Credit
Projects financed with below market federal loans are no longer considered "federally subsidized" and are eligible for the 9% credit. Therefore, projects funded with HOME loans, as well as other loans funded from federal sources and having a below market interest rate, will be permitted to use the 9% credit. Projects with below market HOME loans are no longer prohibited from using the 30% basis boost. This rule does not apply to loans funded with bond proceeds. This new rule is effective for all buildings placed in service after July 30, 2008.
New Opportunity for 30% Basis Boost
The state housing agency has the authority to provide a project with a 30% eligible basis boost if the agency determines that the boost is necessary to make the project financially feasible as part of a qualified low-income housing project. Each state housing agency is expected to set written standards in the near future governing the reward of this new basis boost. The nature of these standards is not clear. This new rule is effective for all buildings placed in service after July 30, 2008. The state does not have the authority to apply this boost to projects financed with tax-exempt, volume cap bonds, but such projects remain eligible for the existing 30% basis boost if they are located in a qualified census tract or difficult development area.
Required Increase in Rehabilitation Expenditures
Previously, rehabilitation expenditures eligible for the credit must have been in an amount that was the greater of: 10% of the adjusted basis of the building or $3,000 per low-income unit in the building. The Act increases these threshold amounts to 20% and $6,000 respectively. The $6,000 requirement is subject to a cost of living adjustment for any expenditures placed in service after 2009. This new rule is effective for projects receiving allocations of credit after July 30, 2008.
Increase in Community Service Facility Space Eligible for the Credit
The new provision allows for more community service facility space to be included in a project's eligible basis. Previously, the adjusted basis of a community service facility was eligible for the credit to the extent that the increase for the facility did not exceed 10% of the eligible basis of the project. The Act increases this limitation so that the increase is permitted to the extent it does not exceed the sum of (i) 25% of the project's first $15,000,000 of eligible basis and (ii) 10% of the remainder of the project's eligible basis. This new rule is effective for buildings placed in service after July 30, 2008.
Federal Grants Received During the Compliance Period Do Not Affect Eligible Basis
The language relating to federal grants was clarified so that eligible basis shall be reduced by the amount of federal grants used to finance the construction or rehabilitation of a building. Therefore, federal grants received during the compliance period, including interest reduction payments and other ongoing payments, will not cause a reduction in eligible basis. This new rule is effective for buildings placed in service after July 30, 2008.
Threshold Increased for Acquisition Credit Related Party Rule
The acquisition credit is not available if the project is purchased from a related party. The Act changes the related party threshold from 10% to 50%. Under the new rules, a buyer and seller are related only if a partner (or a group of partners in the aggregate) owns more than 50% of both the buyer and the seller. This new rule is effective for buildings placed in service after July 30, 2008.
Waiver of Ten Year Rule for Federally-Assisted or State-Assisted Buildings
Generally, the acquisition credit is available if there is a period of at least ten years between the date the building is acquired and the date that it was last placed in service. This ten year requirement is not applicable if a building is federally-assisted or state-assisted. Federally-assisted is defined as any building which is substantially assisted, financed, or operated under section 8 of the Unites States Housing Act of 1937 (most likely project based only), section 221(d)(3), 221(d)(4), or 236 of the National Housing Act, section 515 of the Housing Act of 1949, or any other housing program administered by HUD or by the Rural Housing Service of the Department of Agriculture. State-assisted building means any building which is substantially assisted, financed, or operated under any state law similar in purposes to any of the laws referred to in the federally-assisted definition. Additionally, the Secretary of the Treasury may waive the ten year rule, upon application from the taxpayer, with respect to a building purchased from an insured depository institution. This new rule is effective for buildings placed in service for credit purposes after July 30, 2008.
Section 8 Modified Rehabilitation Assistance Permitted
Buildings receiving moderate rehabilitation assistance provided under section 8(e)(2) of the United States Housing Act of 1937 are now eligible to receive credits. This new rule is effective for buildings placed in service after July 30, 2008.
Extension of Ten Percent Test Due Date
For project's receiving a carryover allocation, the taxpayer must spend 10% of the project's reasonably expected basis within one year of the date of the carryover allocation. Previously, the 10% test had to have been met by the later of (i) six months after the date of the carryover allocation or (ii) the close of the calendar year in which the allocation was made. This new rule is effective for buildings placed in service after July 30, 2008.
Recapture Bond Not Required Upon Disposition of Building
Upon the disposition of a building or an interest therein, the taxpayer no longer has to furnish a recapture bond to the Secretary, so long as it is reasonably expected that the building will continue to be operated as a qualified low-income building for the remaining compliance period. The Act does create an extended statute of limitations with respect to dispositions that cause a reduction of a building's qualified basis, so that the Secretary may assess deficiencies for up to three years after the Secretary is notified by the taxpayer of the reduction in qualified basis. This new rule is effective for interests in buildings disposed of after July 30, 2008 and interests in buildings disposed of on or before July 30, 2008, if it is reasonably expected that such building will continue to be operated as a qualified low-income building for the remaining compliance period.
Former Foster Children May Qualify as Low-Income Tenants
In addition to the current exception for certain students, a unit does not fail to be treated as a low-income unit merely because it is occupied by a student who was previously under the care and placement responsibility of the state agency responsible for administering a plan under part B or part E of title IV of the Social Security Act. This new rule is effective for determinations made after July 30, 2008.
Clarification of General Public Use Requirement
Under the Act, a project does not fail to meet the general public use requirement solely because of occupancy restrictions or preferences that favor tenants (i) with special needs, (ii) 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 (iii) tenants who are involved in artistic or literary activities. This clarification is effective for buildings placed in service before, on or after July 30, 2008.
Reissue of Tax-Exempt Bonds Used to Finance Projects
The Act permits states to collect repayment of tax-exempt bonds used to finance low-income residential rental projects, and use such proceeds to issue a refunding bond that finances the eligible basis of another low-income project, without using additional volume cap. Automatic credits are not available on the second loan. The new loan must be made within six months of the original loan's repayment, the refunding issue must be issued not more than four years after the original issue was issued, and the latest maturity date of any bond of the refunding issue must not be later than thirty-four years after the date on which the refunded bond was issued. This new rule applies to repayments of loans received after July 30, 2008.
Annual Recertification Not Required
Annual income certifications are no longer required for projects in which 100% of the units are rented to tenants who qualify as low-income tenants upon the tenants' initial tenancy. This new rule is effective for years ending after July 30, 2008.
Credits Allowed Against the Alternative Minimum Tax
The Act provides that the federal low-income housing tax credit and the federal rehabilitation (historic) tax credit may now be applied against alternative minimum tax liabilities. The benefit applies to expenditures placed in service after 2007 (low-income credit) and to expenditures taken into account after 2007 (historic credit).
Increase in Tax Exempt Use Property Permitted with the Rehabilitation (Historic) Credit
The Act increases from 35% to 50% the portion of a project that may be leased to tax-exempt entities before such portion of the project is deemed to be tax-exempt use property, the expenditures with respect to which are not eligible for the rehabilitation (historic) credit. This new rule applies to expenditures properly taken into account for periods after December 31, 2007. This rule does not apply for depreciation purposes.
If you have questions, please contact any one of the following Gallagher Real Estate and Business Transactions tax attorneys:
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