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Tax Legislation Announced by Tax-writing Chairs Wyden and Smith Would Temporarily Reduce 50% Financed-By Test to 30% for 2024-2025, Restore 12.5% LIHTC Boost for 2023-2025

Published by Dirk Wallace and Peter Lawrence on Thursday, January 18, 2024 - 9:40AM

Editor’s note: This post was edited on 1/24/2024. Statements referring to the preservation of existing affordable housing were clarified and expanded. 

House Ways and Means Committee Chair Jason Smith, R-Missouri, and Senate Finance Committee Chair Ron Wyden, D-Oregon, on Jan. 16 introduced the Tax Relief for American Families and Workers Act of 2024, which includes two important provisions for the low-income housing tax credit (LIHTC) community: 

  1. It would decrease the private activity bond (PAB) financing threshold for 4% LIHTCs from 50% to 30% for 2024 and 2025, and 
  2. It would restore the 12.5% increase in annual 9% LIHTC allocation for 2023 through 2025. 

Both provisions, which are part of the Affordable Housing Credit Improvement Act (AHCIA, H.R. 3238, S. 1557), would have a profound effect on affordable housing development and would likely make up the largest increase in affordable rental housing resources since 2000. In total, they will provide more than 200,000 new and preserved affordable rental homes, said Wyden in a press release, based on an estimate provided by Novogradac.

While this blog will focus on the bill’s effects on affordable housing, the section-by-section technical summary of the Tax Relief for American Families and Workers Act of 2024 provides details on all of the bill’s provisions.

Decreasing the PAB Financing Threshold from 50% to 30%

A building can receive LIHTCs two ways. First, a building can receive a credit allocation from the state or local LIHTC allocating agency. Second, if at least 50% of the aggregate basis of the land and building is financed by PABs, subject to a state PAB volume cap, 4% LIHTCs can be awarded. Congress previously lowered this threshold from 70% to 50% in 1990.

The announced legislation further lowers that threshold to 30% for developments financed by PABs with an issue date before 2026. For buildings that already have PABs, the legislation provides a transition rule. The rule requires that a building have 5% or more of its aggregate basis financed by PABs with an issue date in 2024 or 2025. 

This provision is effective for buildings placed in service after Dec. 31, 2023. However, in the case of rehabilitation expenditures, which are treated as a separate new building by the Internal Revenue Service, the building is considered placed in service at the end of the rehabilitation expenditures period, according to the section-by-section summary. The 30% requirement is applied to the aggregate basis of both the existing building and the rehabilitation expenditures.

Decreasing the PAB financing threshold is most helpful to the 19 states plus Washington, D.C., where there is more demand for PAB cap for rental housing than is allocated by the state. Novogradac estimates that this provision would finance the creation and preservation of an additional 186,310 affordable rental homes. Historically, 65% of rental homes financed with the 4% LIHTC are preserved while 35% are new construction.

Blog Graphic: Lowering the 50% Test to 30%

 

Increasing 9% LIHTC Allocations

Previously, as part of the fiscal year 2018 appropriations act, Congress increased the 9% LIHTC state ceiling by 12.5% in calendar years (CY) 2018 through CY 2021, which allowed states to allocate more credits for affordable housing development. This provision restores the 12.5% increase in 9% allocations for CY 2023 through CY 2025 and is effective for taxable years beginning after Dec. 31, 2022. While states obviously cannot make allocations in 2023, the LIHTC statute allows states to carryover authority for one year, so in effect, states would have a 25% increase in 9% allocations for 2024. Novogradac estimates the 9% allocation increase included in the bill would finance the creation and preservation of an additional 16,263 affordable rental homes. The majority, 75%, of rental homes financed with the 9% LIHTC have historically been new construction, with the other 25% of rental homes being preserved.

Blog Graphic: 9% LIHTC Allocations

 

Together, Novogradac estimates a total of an additional 202,573 new and preserved affordable rental homes would be financed, supporting 304,190 jobs, generating $34.3 billion in wages and business income as well as $11.9 billion in federal, state and local tax revenue.

See below for state estimates of the impact of both LIHTC provisions:

Blog Graphic: Estimates of Rental Homes, Jobs, Wages & Business Income and Tax Revenue Generated Under LIHTC Proposal

 

While Important Now, Provisions Would Be Even More Impactful If Congress Extends Them

Both LIHTC provisions will expire in 2025, lining it up with nearly 30 tax provisions from the Tax Cuts and Jobs Act that also expire in 2025. The new markets tax credit likewise expires in 2025. All these expirations will likely lead Congress to consider a large tax bill in 2025 and make tax legislation a big priority that year. If Congress failed to act, most Americans would be subject to a tax increase.

If Congress were to enact both LIHTC provisions in the pending tax bill and then extend them in 2025 tax legislation, Novogradac estimates that those provisions would finance an additional 912,610 affordable rental homes.

Blog Graphic: States Seeing Largest Increase in Affordable Rental Homes Due to LIHTC Proposal

Other Key Provisions 

The bill does more than just expand the LIHTC, it also:

  • Restores 100% bonus depreciation for 2023-2025 while retaining the 20% bonus for 2026,  
  • Restores depreciation and amortization to the calculation of the limit to which debt can be deducted under Section 163(j), 
  • Restores research and development expensing,
  • Enhances the child tax credit to allow more low-income families to receive a tax refund,
  • Increases global competitiveness, in part, by providing relief from double taxation on United States-Taiwan cross border investment through changes to the U.S. tax code.
  • Provides individuals with disaster tax relief (no disaster LIHTC allocation is provided), primarily from West coast fires and the train accident in East Palestine, Ohio, and 
  • Largely pays for the legislation by ending the Employee Retention Tax Credit. 

Next Steps

Of course, the bill’s enactment is not guaranteed. The House Ways and Means Committee will consider the legislation Jan. 19. If approved and passed by the House, the Senate Finance Committee may consider the legislation in January or early February. Wyden and Smith will likely need to find a “must-pass” legislative vehicle for the tax bill. Wyden has stated he hopes Congress will enact it by Jan. 29 to avoid disrupting tax filing season.

To learn about more legislative and regulatory updates, please consider joining Novogradac’s LIHTC Working Group. To stay up to date on the latest affordable housing news, subscribe to the Novogradac Journal of Tax Credits

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