Housing-Related Tax Provisions Expiring at the End of 2013

October 23, 2013

With the government shutdown/debt ceiling conflict resolved, at least for the next few months, it is a good time to revisit the policy debate that preceded it – the fiscal cliff.

In January, a number of real estate related tax provisions were extended for another year. At the end of 2013, these provisions are set to sunset. And for now, there appears to be little likelihood of a “tax extenders” bill being enacted before the end of the year.

The following are housing or real estate related tax provisions that expire at the end of 2013:

Housing Rules

  • Mortgage debt forgiveness tax relief: rule that prevents tax liability arising from many short sales or mitigation workouts involving forgiven, deferred or canceled mortgage debt.
  • Deduction for mortgage insurance: reduces the after-tax cost of buying a home when paying PMI or insurance for an FHA or VA-insured mortgage; $110,000 AGI phase-out.
  • The section 25C energy-efficient tax credit for existing homes: remodeling market incentive with a lifetime cap of $500.

Business Rules

  • The section 45L new energy-efficient home tax credit: allows a $2,000 tax credit for the construction of for-sale and for-lease energy-efficient homes in buildings with fewer than three floors above grade.
  • The 9% LIHTC credit rate: absent the credit fix, the LIHTC program would suffer a loss of equity investment for affordable housing projects; in place for 2013 allocations.
  • Base housing allowance rules for affordable housing: income definition rules.
  • The section 179 small business expensing limits: offers cash flow and administrative cost benefits for small firms, with limits of $500,000 for deductions and $2 million for capital purchases.
  • The section 179D deduction: provides a deduction for some energy-efficient upgrades to multifamily and commercial properties.
  • New Markets Tax Credit: no new allocations of this community development tax credit.

At this time, it would be prudent for homeowners and housing stakeholders to assume that all of these tax provisions will sunset at the end of 2013. If these rules are extended, it will almost certainly occur retroactively through legislation passed later in 2014. And of course, comprehensive tax reform could change all tax rules substantially.

Finally, while not expiring at the end of 2013, it is worth noting that the section 25D 30% credit for installation of solar, wind, fuel cell, or geothermal residential power production property expires at the end of 2016. This credit can be used in connection with both remodeling and new construction and is claimed by the homeowner.

Expiring Housing Tax and Finance Law: What’s on the 2012 Policy Agenda

January 5, 2012

Due to heated budget debates during the second half of last year, Congress failed to approve a 2011 “tax extenders”  bill, legislation that typically extends certain business and individual tax rules that expire every year or two.

This development sets up a policy fight in 2012 during which advocates will seek a retroactive extension of now-expired tax rules. However, this is not the first time this has happened. In late 2010, Congress approved a retroactive extenders bill for tax rules that expired at the end of 2009. Nonetheless, today’s budget and political situation is much different, making the prospects for the extenders debate more uncertain.

Among the tax extender items are a number of housing and construction policies. These include the following rules that expired at the end of 2011:

In its weakened 2011 form, this tax credit offered homeowners an up to $500 benefit for improving an existing home with qualified energy-efficient property, such as windows, doors, HVAC equipment and insulation.

  • The section 45L tax credit for new energy-efficient homes

This tax credit is equal to $2,000 per home for builders of for-sale or for-lease housing units that achieve a 50% reduction in heating and cooling consumption relative to the 2004 supplement of the 2003 IECC.

  • The deduction for mortgage insurance payments (private mortgage insurance, as well as FHA, RHA, and VA)

The deduction treats mortgage insurance payments as mortgage interest for the purpose of the MID, but only for taxpayers with adjusted gross income (AGI) no higher than $110,000 (phase-out begins at $100,000 AGI).

  • The section 198 brownfield expensing rule

This provision allows immediate write-off of qualified clean-up costs related to development of certain previously occupied sites.

Another rule that expired at the end of 2011 and that affects both individuals and businesses (business organized as pass-thru entities, such as S Corporations and LLCs) is the increase in the Alternative Minimum Tax (AMT) exemption amount (the so-called “AMT patch”). The AMT patch expired at the end of 2011, and if not extended for tax year 2012, more than 20 million taxpayers, many of them small business owners, will face higher tax bills due to the use of the pre-2001 exemption amounts.

Being captured by the AMT can complicate other tax rules as well. For example, absent the AMT patch, home builders cannot claim the 45L tax credit, if organized as a pass-thru entity, and homeowners who pay AMT cannot claim the 25C credit.

The list of expiring tax provisions for 2011 is just a taste of what’s to come. At the end of 2012, the Bush-era tax cuts, including the top 35% rate, the bottom 10% rate, the 15% preferred rates on capital gains and dividends, the repeal of the Pease limitation on itemized deductions, and the current 35% estate tax regime, among other rules, will all expire.

For housing policy, at the end of 2012, the current tax exemption on phantom income arising from cancelled/forgiven principal residence mortgage debt expires. Absent this exemption, established in 2008’s Housing and Economic Recovery Act and supported by the housing industry, distressed homeowners facing foreclosure or deed-in-lieu of foreclosure situations could find IRS tax bills waiting due to written off mortgage amounts. Among other effects, expiration of this tax rule would also further hinder mortgage workout and mitigation programs.

For the multifamily affordable housing industry, at the end of 2013, the fixed 9% rate for Low-Income Housing Tax Credit expires. If this rule, also established in 2008, were to expire, the applicable credit rate for the 9% credits would fall to less than 8%, reducing equity available for investment in affordable housing. Due to advocacy efforts of NAHB and its allies in the affordable housing sector, legislation was recently introduced in the House and Senate that would make permanent the 9% rate.

And at the end of 2013, the section 179D deduction for energy-efficient remodeling of commercial and multifamily properties expires.

Further down the road, the section 25D 30% tax credit for home installation of solar panels, geothermal heat pumps, and other qualified power producing property, expires at the end of 2016.

Finally, on the housing finance side of the ledger, at the end of 2013, the retained higher loan limits for FHA-backed mortgages ends. This measure was approved by the Congress in November. It re-established FHA’s national ceiling for mortgages to $729,750 from the $625,500 to which it had fallen. It also restored the formula for determining local FHA loan ceilings to 125% of the area median home price from the 115% it fell to on October 1st. The retention of the higher limits and the 125% multiplier positively affected homeowners in 620 counties nationwide.

And of course, all of this occurs within an environment in which the future of federal backstop for mortgages and the mortgage interest deduction are under intense debate.