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Low-Income Housing Credit Update The last quarter of 2000 brought some good news from Congress for practitioners dealing with Sec. 42 low-income housing tax credits (LIHCs). The good news is in the Community Renewal Tax Relief Act of 2000 (the Act), passed by the 106th Congress and signed by President Clinton on Dec. 15, 2000. Under Title I, paragraph D, the cap on the LIHC (which had not changed since it was enacted as part of the Tax Reform Act of 1986) was increased. The per capita amount in the state allocation pool is set in Sec. 42(h)(3)(C). However, beginning in 2001, the LIHC will increase from $1.25 per state resident to $1.50, and, in 2002, the rate will increase to $1.75 and will be indexed for inflation. Paragraph E of the Act also increased the tax-exempt bond volume cap for each state from $50 per capita to $62.50 in 2001 and to $75 in 2002. Again, the cap rate will be adjusted for inflation after 2002. Other changes to the LIHC low-income tax credit program included in the Act include:
All these provisions are generally effective for years beginning in 2000.
Ten Percent Test The 10% test is critical because of its "all or nothing" aspect. If a project fails to satisfy this test when seeking a carryover allocation, it is not entitled to credits. Previously, a taxpayer had to expend 10% or more of the reasonably expected basis prior to the end of the calendar year in which the credit was allocated to the project, to receive a carryover for that year. The new provision states that, if a building receives an allocation in the second half of a calendar year, the taxpayer has six months from the allocation date to meet the 10% threshold. This is a significant change and should be of great benefit to developers who get allocations late in the year.
Basis Rule Changes Basis issues have been the subject of much discussion and litigation in the past decade. The Code, regulations, revenue rulings, revenue procedures and industry practice for Sec. 42 have had many and various interpretations. Recent technical advice memoranda and the current tax relief act indicate that the IRS and Congress are attempting to make compliance with this very complex Code section less difficult. The definition of "qualified census" tract has been expanded to include any census tract with a poverty rate of 25% or more. This is a significant expansion of the census tracts qualifying for the enhanced credit, which can increase the eligible basis for new construction or rehabilitation to 130% of development costs. To qualify for this increased credit, the building must be located in a qualified census tract or a difficult development area. Eligible basis for projects in a qualified census tract may now include a community service facility not in excess of 10% of the total project eligible basis. Community facilities are designed to provide job training and other services primarily for individuals whose income is 60% or less of the area median income. In the past, these facilities were not included in basis because they were not used exclusively for a building's tenants. A new building that receives a Federal subsidy—defined as any debt obligation in which interest is exempt from tax under Sec. 103—is not eligible for the 9% credit and must use the 4% credit. A Farmers Home Administration Loan would be a Federal subsidy. To avoid confusion, the Act provides that assistance received via the Native American Housing Assistance and Self-Determination Act of 1996 does not make projects Federally subsidized; the Service will not limit these projects to the 4% credit.
State Allocation Plans State allocation plans are the rules and guidelines that states use when choosing projects that will receive an allocation of credits. Projects receive points for each of the items on the preferred criteria list in their project. The Act has changed the items listed as preferred criteria. Tenant populations of individuals with children and projects intended for eventual tenant ownership have replaced nonprofit participation as a preference in state allocation plans. In addition, the Act established a new preference for projects in qualified census tracts that use existing housing as part of a community revitalization plan. As the definition of the term "community revitalization plan" is not clear, this provision may cause some confusion among various states.
Administrative Changes Congress enacted the LIHC as a means of providing decent, affordable rental housing. To continue to receive the credit over the compliance period, a project must satisfy the compliance rules for 15 years, and the states that allocate the credits are responsible for ensuring that a project remains in compliance. Congress has provided rules for meeting these compliance requirements and is now providing further clarification. The Act requires site inspections by a state's housing credit agency, to monitor projects for compliance with habitability standards. The requirement's intent is the preservation of the quality of the housing stock; it appears to benefit both tenants and investors. Market studies for housing needs (which have been a common practice in the past during the application process) are now part of the codified requirements, effective for tax years beginning in 2001. Because these studies may not have been an official part of a state's current qualified allocation plan, there may be some initial confusion until the states can modify their plans. In addition, a written explanation of any variations to the established priorities and selection process for any allocation must now be available to the general public (which developers should view with relief). Although there will be more credits to allocate, it is not anticipated there will be any less competition for these credits.
Stacking Rules The stacking rules have been modified to establish the following order for tax credits used by states: 1. Unused state housing credit ceiling from the preceding year; 2. Current year's allocation of credits; and 3. National pool allocations. In the past, the stacking rules have indicated that the first allocation of credit should come from the current year's allocation and any returned credits. Secondly, the allocation had been made from any unused credits in the carryforward pool (unused credits from previous year) and, finally, from the national pool. Credits that go into the national pool come from the unused state carryforward credits. Based on the new ordering criteria, it appears there will be fewer credits in the national pool. The changes to Sec. 42 contained in the Act are long in coming. The hope of the industry is that these changes indicate Congress and the IRS are trying to ensure that decent and affordable rental housing is available to those in desperate need of this assistance and that logic is being used in the administration of the program. From Marianne Heard, CPA, MST, Boston, MA |
