$1.5 Trillion Tax Cut's Impact on Affordable Housing
The president signed a $1.5 trillion tax cut bill into law on December 22, 2017. The law retained the Low Income Housing Tax Credit (LIHTC) and preserved the tax exemption for private activity bonds. However, there are a number of changes that will have an indirect impact on how affordable housing properties are financed and operated. Let’s start with five.
1) Corporate Tax Rate Drops to 21%. Affordable housing properties need equity to operate, and investors provide equity in return for tax benefits; primarily tax credits and tax losses. The value of tax losses generated are directly correlated to the tax rate of the taxpayer receiving the loss. With a reduction in corporate tax rates, tax benefits of investing are reduced, reducing the amount of equity corporate investors are willing to provide.
2) Depreciation. For property placed in service after December 31, 2017, there will be a temporary 100% cost recovery of qualifying business assets, and the ADS recovery period of residential rental property is reduced to 30 years. Reduced depreciable lives will increase the time value of money on tax losses created by depreciation expense, but will also decrease tax basis necessary to take losses more rapidly.
3) Repeal of Partnership Technical Termination Rule. Under previous law, a partnership was terminated if within any 12-month period, there was a sale or exchange of 50% or more of the total interest in partnership capital and profits (a technical termination). As a result, some of the tax attributes of the old partnership terminated, the partnership's taxable year closed, potentially resulting in short tax years, partnership-level elections generally ceased to apply, and the partnership depreciation recovery periods restarted. The new law eliminates the technical termination rule. A partnership is terminated only if no part of any business, financial operation, or venture of the partnership continues to be carried on by any of its partners in a partnership. The transfer of limited partner interests in affordable housing partnerships will no longer require a technical termination.
4) Credit For Qualified Rehabilitation Expenditures (QRE) Now Over 5 Years. The new law repeals the 10% credit for pre-1936 buildings but retains the 20% credit for QREs with respect to certified historic structures. However, now the 20% credit is allowable ratably over a five-year period starting with the year the qualified rehabilitated building is placed in service. What had been a 20% credit available to taxpayers in the year the building was placed in service has effectively been converted into a 4% credit taken in each of five years starting with the year the building is placed in service. The loss of the 10% credit and loss in value of the 20% credit due to the time value of money may impact the feasibility of an affordable housing development.
5) Requires the Use of the C-CPI-U. A number of affordable housing tax parameters are adjusted for inflation to protect from the effects of rising prices. Under previous law, inflation adjustment computation was based on annual changes in the level of the Consumer Price Index for all Urban Consumers (CPI-U). Effective for tax years beginning after 2017, the new law modifies the inflation adjustment computation rules to require use of chained CPI-U (C-CPI-U). The C-CPI-U, like the CPI-U, is a measure of the average change over time in prices paid by urban consumers. However, the C-CPI-U differs from the CPI-U in that it accounts for the ability of individuals to alter their consumption patterns in response to relative price changes. This change will decrease inflation adjustments in LIHTC and private activity bond allocations in future years.
The full impact of the $1.5 Trillion Tax Cut on Affordable Housing won’t be determined for some time. What has been determined is that the tax law changes went into effect on January 1, 2018.
If you have any questions about these changes, please contact Brad Bowers at [email protected]
You can follow this conversation by subscribing to the comment feed for this post.