Senate Tax Reform Bill More Friendly to Affordable Rental Housing

Published by Dirk Wallace, Michael Novogradac on Wednesday, November 15, 2017 - 12:00am

The most significant affordable housing headline that came out of the two versions of the Tax Cuts and Jobs Act legislation being debated by the House of Representatives and the Senate Finance Committee was the preservation of the low-income housing tax credit (LIHTC), which is a tremendous achievement given that most other business tax credits are proposed to be repealed.

However, the news isn’t all good and the two bills–as currently drafted–contain significant differences for those in the affordable housing community. Most notably, the Senate version retains the tax-exemption for private activity bonds (PABs), which generate 4 percent LIHTCs to finance more than 50 percent of affordable rental housing annually. The House version of the bill repeals that tax-exempt status, a change that Novogradac & Company estimates would result in 700,000  fewer units being built over a 10 year period.  (The aggregate lost units is nearly 1 million when taking into account the effect of the lower corporate tax rate and the change to chained CPI.)

That difference sets the scene for a potential battle ground if both bills pass their houses of Congress with the original provisions for PABs.

But there are other significant differences (and similarities) between the bills that affect the LIHTC.

  • Corporate rates. The House version of the bill would set the top corporate tax rate at 20 percent starting Jan. 1, 2018. The Senate version of the bill would also set the top corporate tax rate at 20 percent, however, the Senate delayed the effective date to Jan. 1, 2019.
  • Deductibility of business interest. The House and Senate bills limit the deduction of interest expense for businesses to 30 percent of the business’s adjusted taxable income. The limitation applies at the entity level, which includes partnerships. 
    • Small business exception. Both the Senate and House bills have exceptions for small businesses, with the Senate limit at $15 million in gross receipts and the House bill at $25 million. It is unclear if LIHTC partnership could avail themselves of this exception.
    • Real estate businesses. The interest expense deductibility limit in the House bill does not apply to real estate businesses. The Senate bill offers real estate businesses the option to elect out.  However, real estate businesses that elect out must depreciate real property using the Alternative Depreciation System ((ADS), currently 30 years for buildings)
    • Real property depreciable life. The Senate bill changes the depreciable life for residential and non-residential real property to 25 years.  However, real estate businesses that elect out of the interest deductibility limitation cannot use this shorter life, as noted above. The House bill does not alter the depreciable life of real property.
  • Expensing of depreciable assets. Both the House and Senate bills allow for the immediate expensing of assets for new investments, excluding buildings, made after Sept. 27, 2017 for at least five years. The House bill does not allow real estate businesses to take advantage of this provision, however, real estate businesses appear to be included in the Senate version.
  • Inflation factors. Both the House and Senate bill replace the consumer price index for all urban consumers (CPI-U) inflation factor with “chained CPI” as an alternate measure of inflation for indexing tax parameters. This would reduce future LIHTC allocations and volume cap for tax-exempt private activity bonds.

Directionally, for the affordable housing community, the repeal of private activity bonds, a lower corporate tax rate, and a change to chained CPI all have an adverse effect on the production and renovation of affordable rental housing. The limit on interest expense deductibility, to the extent it would apply to affordable rental housing or possibly a longer real property depreciable life, would also harm affordable rental housing production. Asset expensing and the shorter 25-year depreciable life, to the extent available, would aid-slightly-in affordable rental housing production.

Novogradac & Company LLP continues to analyze these provisions.  Email mailto:[email protected] with any questions you have regarding the impact of tax reform on affordable rental housing.