Congress Moves Closer to Extending LIHTC Exchange Program

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On March 10, Congress moved closer toward final approval of several affordable housing, historic preservation, and economic development tax incentives as the U.S. Senate passed its own version of an extenders bill (H.R. 4213).

The Senate-passed measure is similar in many respects to the version of H.R. 4213 approved by the House of Representatives in December. House and Senate lawmakers will now resolve their differences and craft a compromise bill for votes on final passage by both chambers, which could occur as early as April. Congress is in recess March 29-April 9.

Both versions of H.R. 4213 would:

  • Extend the Section 1602 low-income housing tax credit (LIHTC) exchange program for one year under rules similar to those that applied in 2009, allowing state housing credit agencies to exchange a portion of their 2010 housing credit authority for cash grants to provide assistance to stalled LIHTC projects. State agencies would have to return to the U.S. Treasury any exchange fund dollars not used to make awards to projects by 1/1/12. The Senate bill would also expand the program to permit the exchange of Gulf Opportunity (GO) Zone and Midwest disaster area housing credits.
  • Extend the federal new markets tax credit program for one year, through 2010, with $5 billion in allocation authority for a new funding round.
  • Extend the current higher tax credit rates for rehabilitation expenditures for historic and older (i.e. pre-1936) buildings located in the GO Zone – parts of Alabama, Mississippi, and Louisiana – for one year. These higher rates – 26% for historic structures and 13% for pre-1936 buildings – would apply to rehab expenditures incurred before 1/1/11.
  • Extend special favorable tax treatment for charitable contributions of historic preservation easements, the ability to expense brownfield remediation costs, and federal tax incentives for empowerment zones.

The Senate bill but not the House would extend for two years, through 12/31/12, the placed-in-service deadline for LIHTC projects receiving allocations of special GO Zone, Rita GO Zone, and Wilma GO Zone housing credits.

On March 24, the House approved a small business jobs bill (H.R. 4849) that would extend the Section 1602 exchange program to certain 4% credit tax-exempt bond projects. Exchanges would be permitted for buildings placed in service after the date of legislative enactment but before 2011.

H.R. 4849 would also extend authority for Build America Bonds though June 30, 2013.

Additional Changes Sought

Advocates are continuing their efforts to try to get Congress to approve additional LIHTC amendments – provisions they believe critical to restoring housing credit equity investment to a healthy level.

 “They’ve only addressed a small proportion of the overall agenda that we’re interested in – the exchange provisions,” said Washington, D.C. attorney Richard Goldstein, a partner with Nixon Peabody LLP and counsel to the Affordable Housing Tax Credit Coalition (AHTCC). “We’re hopeful that they will take up other parts of the agenda, including the housing credit carryback and the provision that deals with individual investors who are taxed as individuals in pass-through entities.”      AHTCC also supports, and is part of a larger industry coalition (Rental A.C.T.I.O.N.) lobbying for, provisions:

(1) extending the carryback period for housing credits to five years for existing and new investors; and (2) modifying the passive loss rules so that taxpayers in certain business entities, such as community banks organized as S corporations, can utilize the housing credit.

On March 18, Sen. Jeff Bingaman (D-N.M.) introduced a bill (S. 3141) that incorporates the five-year housing credit carryback proposal. Bingaman and the bill’s five original co-sponsors all sit on the Finance Committee.

Senate-passed H.R. 4213 also includes a revenue-raising provision that would incorporate into the federal tax code, or “codify,” the “economic substance doctrine.” This doctrine, which has evolved through a series of court decisions, provides that a taxpayer’s motivation for undertaking a transaction can’t be to avoid federal taxes. Rather, the transaction must have economic substance (i.e. the expectation or hope of a profit).     

Goldstein noted that an explanation of this Senate-passed provision, crafted by the congressional Joint Committee on Taxation (JCT), is more favorable than the language in a JCT footnote explaining a similar codification provision contained in a health care bill passed by the House last fall. Goldstein felt that the Senate version would not have an adverse impact on housing credit transactions. (For background on proposal, see Tax Credit Advisor, January 2010, p. 35.)