Everyone knows about the “Fiscal Cliff,” which was probably more like a small hillock. And by now, most folk know that Congress and the President figured out a last minute (actually, it was after the last minute, but who’s counting) compromise to avoid the tax increase components of the problem. But the popular press has concentrated on the costs and benefits for individuals, families and big businesses. There were some features in the H.R. 8, the American Taxpayer Relief Act of 2012 (ATRA), that will change some rules for developers of affordable housing as well.
Low-Income Housing Tax Credits (LIHTCs): Back when the LIHTC was created, the tax credit rates for the two forms of LIHTC (i.e., the “9%” and “4%” credits) were actually nine and four percent. However, those rates were allowed to float over time and have gone up and down depending upon capital market forces. Novogradac & Company and other firms have reported those LIHTC percentages, which have exceeded 9% in some years (infrequently) and been as low as 7.5% in some recent years. As part of the Housing and Economic Recovery Act of 2008 (HERA), Congress fixed the credit percentage for 9% LIHTCs at nine percent, and that provision had been extended, but was due to expire at the end of 2012, which would have returned the floor rate for 9% LIHTCs to the floating level, and probably have dropped it as much as one-sixth.
Unfortunately, they did not also fix the rate for 4% LIHTCs, and that has continued to decline, until it is now below 3.25%.
ATRA, which addressed the tax side of the “Fiscal Cliff,” extended the floor percentage for 9% LIHTCs until the end of 2013. It also redefined the applicability of the higher rate by applying it to allocations made by state housing finance agencies before January 1, 2014, rather than linking it to the “placed in service date,” as it had in the past. That effectively extends the extended floor rate into 2014 for previously allocated LIHTCs and 2015 for LIHTCs allocated in 2013. This change does not apply to commitments of future year LIHTCs during 2013. And, once again, the 4% LIHTCs were not included in this extension.
New Markets Tax Credits (NMTCs): Although NMTCs are not directly useful for housing developments, they have frequently been used to subsidize the nonresidential portions of mixed use developments, especially transit oriented development. ATRA retroactively extended the NMTC program for 2012 and 2013, provided for annual allocations of $3.5 billion, and extended the time for reallocated unused funds until 2018.
Military Housing Allowance: ATRA extended a provision that allows military families to exclude their basic housing allowance from their income for purposes of calculating whether the household qualifies as a low-income tenant until December 31, 2013. This will permit military families who qualified as low-income under this provision to stay in their current homes, and others to qualify for housing assistance.
Mortgage Forgiveness Debt Relief Act: Sometimes just called the Mortgage Debt Relief Act, adopted in 2007, provided a significant tax benefit for homebuyers who received some form of debt forgiveness as part of resolving their home mortgage problems. Normally, if a taxpayer receives a debt reduction, the cancellation of debt is treated as income for tax purposes. During the mortgage crisis of the past half dozen years, many thousands of homebuyers negotiated mortgage principal reductions, or agreed to “short sales,” in order to escape unsupportable mortgage debt. The Mortgage Debt Relief Act allowed taxpayers to exclude the cancellation of debt from their incomes for tax purposes. This Act was scheduled to sunset at the end of 2012, but ATRA extended it for another year. Loss of this tool would have adversely affected the 2012 National Mortgage Settlement agreement entered into between most states and the five largest mortgage servicers.
Mortgage Insurance Premium Tax Exemption: ATRA also reinstated the deductibility of private home mortgage insurance premiums in certain cases. Originally created in 2007 as part of the Tax Relief and Health Care Act of 2006 for one year and later extended, this deduction expired at the end of 2011, but has now been reinstated for tax years 2012 and 2013. While the full deduction is only available to those with taxable incomes of $100,000 or less, taxpayers with incomes of less than $110,000 qualify for a proportion of the total.
Unemployment Insurance Benefits (UIB): While not strictly a housing program, the Federal Emergency UIB program has become a lifeline for many hundreds of thousands of Americans who lost their jobs and have exhausted their state UIB eligibility of 26 weeks. Historically, Federal UIB payments were provided to the states for up to 99 weeks of eligibility in times of recession. Earlier changes in 2012, adopted by Congress and signed by the President, modified the extension period, limiting it to 73 weeks in states with the highest unemployment rates (including California) and reducing the extension period to 40 weeks in states with lower rates of unemployment. In California, this extension spared about 400,000 unemployed workers from losing their benefits at the end of 2012. However, ATRA does not extend additional UIB for those who have already exhausted their eligibility, and the funding may be cut as part of the sequestration process that was deferred for two months (see below).
The extension will allow the unemployed to keep paying rent, and feeding their families for a little while longer.
“Fiscal Cliff” Part II: What ATRA did not do was address the spending side of the Federal Budget, Debt and Deficit issues facing the President and Congress. It did push off the sequestration issue for two months to allow the new Members of 113th Congress, in both the House of Representatives and the Senate, to be sworn in, find their offices, elect their leadership and settle into their new committee assignments.
However, Fiscal Cliff, Part 2, the battle over expenditures and raising the debt limit has already been joined between those who would cut deeply into social service programs and entitlements, and those who want to preserve the safety net for those hardest hit by the recession and slow recovery. Stay tuned for more debate and conflict in the halls of power.