The US Congress passed a tax reform bill at the end of 2017 that low income housing advocates say could have a negative effect on the low-income housing market. According to the Housing Advisory Group, the Republican tax law has overall not been good for the production of affordable housing for low income Americans. Let’s dive into the potential 2019 impact on tax reform and low income housing.
On the up side, the plan is maintaining the low-income housing tax credit program. But private activity bonds have been cut, which is cutting off the flow of 4% LIHTC bond financed housing, which account for approximately 40% of low-income housing production, according to Enterprise Community Partners.
The tax law also reduces the corporate tax credit to 20% from 35%. Without changes to the LIHTC program, this change makes the housing credit worth not as much and could reduce the desire for investors to put money into affordable housing. The law does maintain the LIHTC, but it does not add value into the program to make up for changes that have been proposed, per affording housing industry executives. It is estimated that the loss of investor equity could mean the loss of 200,000 affordable rental homes or more over a decade. It is believed that much of the loss could be dealt with through a two-step process to boost allowable LIHTCs and to modernize the formula for credit percentage.
It also is important to note that the historic tax credit, which has been used over time with the LIHTC to do rehabs of historic buildings and make them affordable housing units, and the New Markets Tax Credit, which has been used to boost community development, may be eliminated. The NMTC, which was extended through 2019, could be repealed after that.
Affordable housing advocates note that that tax reform law shows a low regard for lower income rural and urban communities by repealing the New Markets Tax Credit program, which they say is an important part of the tax code that has put over $80 billion into affordable housing and has created 750,000 jobs in many of the poorer parts of the country.
The tax reform law also is changing inflation adjustments in the tax code from factor based on the consumer price index for all urban consumers to one that is based on chained CPI U. Many economists think that the chained CPI U offers a better estimate of changes in cost of living from month to month as it accounts for the effects of substation on cost of living changes. The change will reduce inflation adjustments in LIHTC and private activity bond allocations for years in the future. It is expected it will lead to a loss of 19000 affordable rental home or more over a decade.
Further, the law reduced the depreciation cost recovery for rental real estate to 25 years, but it is only allowing that benefit if the interest that is being deducted is limited to net interest expense. Also, the law allows interest deductibility limitations that can be avoided if properties for LIHTC elect alternative depreciation from 40 to 30 years.
The final law is not providing reductions from the past law for depreciation cost recovery for real estate that is subject to interest deductibility limitations. So, most LIHTC properties will probably elect out of these limitations and be subject to ADS cost recovery for 30 years. It is estimated that the effect of changes on depreciation and interest deductibility of LIHTC properties mean there will be no net increase in affordable housing production in the next several years.
The new law, in addition to reducing the number of affordable rental homes by 220,000 over 10 years, also will likely lead to rental properties that will serve people with higher incomes and fewer social services.