On Friday, Congress came to agreement on tax reform in a conference report on the Tax Cuts and Jobs Act, reconciling the differences between the House and Senate bills. Private Activity Bonds and the 4% Low Income Housing Credit are retained in the final tax bill. These critical programs, which provide the financing for nearly half of affordable housing in the U.S, were preserved due to the unified advocacy efforts of the affordable housing community. While we can celebrate this advocacy accomplishment that averted disastrous elimination of Private Activity Bonds, affordable housing will still take a hit. It is estimated that Low Income Housing Tax Credit pricing will be lowered by ~15% due to the lower corporate tax rate, creating financing gaps in projects. Amendments to offset this loss and amendments to adopt meaningful reforms for the housing credit, were all rejected during this fast moving legislative process.
The House is expected to vote on the tax bill tomorrow with the Senate vote to follow. According to analysis by Novogradac and the Action Campaign, the conferenced version of the Tax Cuts and Jobs Act would:
- Preserve Tax-exempt Multifamily Private Activity Bonds (Housing Bonds), which provides critical financing to ~85% of all Housing Credit developments in NYC.
- Fully Retain the Low-Income Housing Tax Credit (Housing Credit), with no modifications. Both the 4% and 9% Housing Credits are preserved and the Sen. Pat Roberts(R-KY) amendment was not included in the final bill, which would have reduced the maximum basis boost from 130 to 125%; made properties in rural areas eligible to receive a basis boost; and replaced the existing Housing Credit general public use requirement exception for artist housing with one for veterans.
- Lower the Top Corporate Tax Rate from 35% to 21%, effective January 1, 2018.
- Reduce the Mortgage Interest Deduction to $750,000 down from the current $1 million for homeowners obtaining new purchase loans on a first or second house. Homeowners with existing mortgages will see no change to their mortgage interest deduction.
- Establish a Base Erosion and Anti-abuse Tax (BEAT), which would affect investors’ ability to use the Housing Credit and other credits to offset certain taxes related to foreign earnings and earnings going to foreign parent companies. However, the conference report mitigates the impact of the BEAT on the Housing Credit by exempting 80% of the value of the Housing Credit from the BEAT.
- Retain the New Market Tax Credit allocation rounds in 2018-2019.
- Retain the Historic Tax Credit at 20%, but taken over five years, rather than when placed in service.
- Repeal the 10% Non-Historic Rehabilitation Tax Credit for pre-1936 properties.
- Cap the State and Local Tax Deduction (income, sales and property tax) at $10,000.
While, the affordable housing production of ~200,000 units nationwide will still be jeopardy due to the equity loss of ~$1.8 billion over 10 years that will result from the reduction in the corporate tax rate, Housing Bonds and the Housing Credit will live to see 2018. New York Housing Conference will continue its fight to strengthen these affordable housing investment tools in the new year!