The House Ways and Means Committee on May 14 approved a budget reconciliation substitute amendment (the Bill) that was meant to accompany the Tax Cuts & Jobs Act (TCJA) extensions. The Bill proposes changes to calculations and qualification criteria for the low-income housing tax credit.

Current law

Taxpayers can claim the low-income housing credit annually over 10 years for costs associated with building or rehabilitating rental housing for low-income tenants. To qualify, a low-income building must either receive a credit allocation from the state or be financed with proceeds from certain tax-exempt bonds, subject to the volume limit for private activity bonds. The total housing credits available for allocation by a state is capped by the state housing credit ceiling, which is determined by several components, including the unused carryforward component, population component, returned credit component, and national pool component.

For non-federally subsidized construction of new housing and substantial rehabilitation of existing housing (i.e. the project receives a state credit allocation), the credit is calculated so that its present value equals at least 70% of a building's qualified basis (referred to as 9% credits). For federally subsidized construction of new housing, substantial rehabilitation of existing housing, and certain housing acquisition costs (i.e., the portion of a rehabilitation project that is purchased), the credit is calculated so that its present value equals at least 30% of a building's qualified basis (referenced as 4% credits).

Proposal

The Bill would increase the state housing credit ceiling for purposes of the 9% credit for calendar years 2026 through 2029 by multiplying the dollar amounts for those years by 1.125.

The requirement for tax-exempt bond financing for purposes of the 4% credit would be adjusted under the proposal to allow additional buildings to qualify for housing credits without needing a state credit allocation. Specifically, buildings would qualify for 4% credits if at least 25% of the aggregate basis were financed by qualified obligations, with certain conditions. Additionally, the definition of difficult development areas would be expanded to include Indian areas and rural areas for buildings placed in service after December 31, 2025, and before January 1, 2030, allowing for increased housing credits.

Effective date

The increase in state housing credit ceilings would be effective for calendar years after 2025. The modifications to the tax-exempt bond financing requirement would apply to buildings placed in service in tax years beginning after December 31, 2025. The temporary inclusion of Indian areas and rural areas as difficult development areas would also be effective for buildings placed in service after December 31, 2025.

Implications

Increasing the amount of 9% credits "allocated" under a state's housing credit ceiling by 12.5% should help provide additional project financing once the credits are monetized. While some of that additional financing will be utilized to cover increasing construction and rehabilitation costs, the additional tax credits mean more units are likely to be generated than would have been otherwise.

The reduction in the percentage of the aggregate basis financed by qualified obligations from 50% to 25% could allow states to stretch their private-activity-bond-volume limit further, potentially doubling the number of affordable housing projects provided under the 4% program. The increased eligibility for 4% credits, however, would also come with the need to secure 25% of project costs from other sources.

Both of these proposals could generate significantly higher production of affordable housing units at a time when there is incredible demand for affordable rental housing across the country.