Low-income housing credit update.

• Author: Lerman, Jerry L.

The last quarter of 2000 brought some good news from Congress for practitioners dealing with Sec. 42 low-income housing tax credits (LIHCs). The good news is in the Community Renewal Tax Relief Act of 2000 (the Act), passed by the 106th Congress and signed by President Clinton on Dec. 15, 2000. Under Title I, paragraph D, the cap on the LIHC (which had not changed since it was enacted as part of the Tax Reform Act of 1986) was increased. The per capita amount in the state allocation pool is set in Sec. 42(h)(3)(C). However, beginning in 2001, the LIHC will increase from $1.25 per state resident to $1.50, and, in 2002, the rate will increase to $1.75 and will be indexed for inflation. Paragraph E of the Act also increased the tax-exempt bond volume cap for each state from $50 per capita to $62.50 in 2001 and to $75 in 2002. Again, the cap rate will be adjusted for inflation after 2002.

Other changes to the LIHC low-income tax credit program included in the Act include:

* Changes to the qualification for the 10% test;

* Changes to the basis rules of the credit;

* Changes in the criteria for the state allocation plans;

* Additional requirements for program administration; and

* Modification of the "stacking rule."

All these provisions are generally effective for years beginning in 2000.

Ten Percent Test

The 10% test is critical because of its "all or nothing" aspect. If a project fails to satisfy this test when seeking a carryover allocation, it is not entitled to credits. Previously, a taxpayer had to expend 10% or more of the reasonably expected basis prior to the end of the calendar year in which the credit was allocated to the project, to receive a carryover for that year. The new provision states that, if a building receives an allocation in the second half of a calendar year, the taxpayer has six months from the allocation date to meet the 10% threshold. This is a significant change and should be of great benefit to developers who get allocations late in the year.

Basis Rule Changes

Basis issues have been the subject of much discussion and litigation in the past decade. The Code, regulations, revenue rulings, revenue procedures and industry practice for Sec. 42 have had many and various interpretations. Recent technical advice memoranda and the current tax relief act indicate that the IRS and Congress are attempting to make compliance with this very complex Code section less difficult.

The definition of "qualified census" tract has been...