Congress prepares to debate tax reform, 1030 exchanges, LHTC

Commercial Real Estate | 6 Sep, 2017 |

There has been much speculation surrounding Congress’s growing appetite to enact significant tax reform. In fact, some have even suggested that given the GOP’s firm grip in Washington, this may be a “once in a generation” opportunity to pass meaningful reform.

The last time Congress passed tax reform was over three decades ago. In 1986, during the Reagan administration, Congress passed the Tax Reform Act of 1986 (TRA ’86), becoming the second of the two Reagan tax cuts. The reform did many things to the tax code including simplifying the code, broadening the tax base and eliminating tax shelters.

While the 1986 Act is widely viewed as a fundamentally sound tax policy, it is also a seemingly fleeting example of bipartisan workmanship at its best. Now 30 years removed from TRA ’86, lawmakers seem poised to once again make significant changes to the code.

Tax reform has the potential to fundamentally reshape the apartment industry. The key to smart tax policy is to promote economic growth, job creation and investment in the community without unfairly burdening a specific sector or taxpayer.

If Congress moves forward with tax reform, the apartment industry urges restraint in two key areas of tax policy.

1031 Like-Kind Exchanges

A Section 1031 Exchange, also known as a Like-Kind Exchange, refers to Section 1031 of the U.S. Internal Revenue Code, which allows capital gains taxes to be deferred if the proceeds are reinvested in a similar property.

Largely unchanged since 1928, like-kind exchange rules encourage future investment in real estate and are a critical tool for building equity, and reducing the need for third-party financing.

For the apartment industry, such transactions allow owners to continue investing in the real estate market while deferring taxes attributable to the sale of their investment. This deferment allows for future investment of capital in order to meet the surging demand for workforce housing.

Like-kind exchanges also help get properties into the hands of new owners with the time, resources and desire to restore and improve them. Without Section 1031, many of these properties would languish — underutilized and underinvested — because of the tax burden that would apply to an outright sale.

Low-income Housing Tax Credit Program

While the Tax Reform Act of 1986 eliminated many sections of the tax code, it also created the most effective tool for creating affordable housing options for the working poor. The Low-Income Housing Tax Credit (LHTC) was added to the Act to encourage investment in affordable housing, and it is responsible for financing nearly three million affordable homes since its inception.

As a public-private partnership, the Housing Credit generates money from investors for the construction of affordable homes and transfers the financial risk of development from taxpayers to the private sector.

In Arizona, the Housing Credit is responsible for creating nearly 50,000 affordable homes, and has had a ripple effect on the health of our state’s economy, supporting over 55,000 jobs and generating $5.28 billion in local income over the past 30 years.

As demand for housing affordability far out-paces supply, it is critical to ensure that the value of the current credit is not diminished during the tax debate.

This legislative update was written by Courtney Gilstrap LeVinus, interim president and CEO of the Arizona Multihousing Association, and Jake Hinman, director of government relations for Capitol Consulting on behalf of AMA.

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