Copyright: Bennian
by Matthew Berger, Vice President, Tax, Student Housing, NMHC
Tax legislation that would enhance the Low-Income Housing Tax Credit and renew and expand tax provisions promoting multifamily investment are on the congressional agenda. The House on January 31 approved the Tax Relief for American Families and Workers Act of 2024 by an overwhelmingly bipartisan vote of 357-70. While the Senate is still determining how it will address the package, the multifamily industry hopes it will be sent to President Biden for his signature within the next several weeks. NMHC strongly supported the bill when it was considered by the House Ways and Means Committee and led a real estate coalition letter expressing industry support prior to action by the full House.
Tax Proposals Now on the Table
The following key provisions in the Tax Relief for American Families and Workers Act of 2024 would benefit the multifamily industry by spurring production and investment:
- Low-Income Housing Tax Credit (LIHTC): The Act would augment LIHTC authority by 12.5 percent between 2023 and 2025, as well as reduce the private activity bond financing threshold to 30 percent from 50 percent in 2024 and 2025, which is required to receive the full amount of 4 percent LIHTCs. It is estimated that these provisions would result in the production and preservation of over 200,000 additional rental homes for low-income households.
- Deductibility of Business Interest: Under current law, taxpayers may deduct business interest subject to a limitation of 30 percent of earnings before interest and taxes (EBIT). Prior to 2022, the limitation was 30 percent of interest, taxes, depreciation, and amortization (EBITDA). Multifamily firms are able to elect out interest deductibility limits (and fully deduct business interest) so long as they depreciate buildings over 30 years as opposed to 27.5 years. The Act would extend through 2025 the 30 percent of EBITDA limitation for taxable years beginning after 2023 (and, if elected, taxable years beginning after 2021). Importantly, the provision would not affect the option for real estate businesses to opt out of the limitation in exchange for a longer depreciation period.
- Bonus Depreciation: The Act would extend 100 percent bonus depreciation for qualified property placed in service after 2022 through 2025 to enable taxpayers to deduct the full cost of certain capital investments with a class life of 20 years or less (e.g., equipment and machinery) included in multifamily buildings. Under current law, 80, 60, 40, and 20 percent bonus depreciation is available in 2023, 2024, 2025, and 2026, respectively.
- Small Business Expensing: Under current law, small businesses may expense $1.22 million in qualifying property as opposed to having to recover costs through depreciation. The limit is reduced by the amount by which investment exceeds $3.05 million. Both amounts are adjusted annually for inflation. The Act would increase the expense limit to $1.29 million and the phase-out threshold to $3.22 million in 2024 and increase those amounts by inflation in subsequent years.
Key Tax Policies Expiring in 2025
While beneficial tax legislation is possible in the near term, the multifamily industry is already gearing up to push for the extension of critical tax policies expiring at the end of 2025. That’s when provisions in the Tax Cuts and Jobs Act that benefit individuals and the pass-through entities and REITs that dominate the multifamily industry expire. This includes reduced marginal income tax rates and the 20 percent tax deduction for qualifying pass-through income and qualified REIT dividends. At the same time, the estate tax exemption will be reduced by 50 percent. Should Congress enact the interest deductibility and bonus depreciation provisions currently pending in the Tax Relief for American Families and Workers Act of 2024, we will push for renewal of those as well.
Notably, a 2025 tax bill may allow policymakers to consider tax provisions that go well outside the realm of simply extending provisions set to expire. Indeed, there could be the possibility of including a robust set of tax incentives designed to spur housing production and address the nation’s housing supply crisis. To that end, we will be strongly supportive of proposals that would:
- Extend and expand the Low-Income Housing Tax Credit (i.e., building upon the 12.5 percent increase in credit authority and reduction in the bond-financing test that may be enacted in the pending Tax Relief for American Families and Workers Act of 2024;
- Establish a Workforce Housing Tax Credit that builds on the Low-Income and Housing Tax Credit and spurs production of multifamily units serving households earning up to 100 percent of area median income;
- Create a tax incentive for adaptive reuse to transform underutilized commercial buildings into multifamily housing; and
- Renew and enhance Opportunity Zones to draw in additional capital and make the incentive work better for rehabilitating multifamily units.
Although Congress is unlikely to address these provisions until 2025, NMHC is already beginning to educate members of Congress about the critical role today’s tax policy plays in spurring investment in multifamily housing. Finally, we will also be guarding against perennial revenue-raising proposals lawmakers could seek to use to offset the cost of extending today’s tax laws. The multifamily industry is constantly vigilant against proposals to tax carried interest at ordinary income tax rates or to eliminate or limit deferral from like-kind exchanges.
