The Act on the whole preserves most capital market-related tax incentives that support financing for real estate projects and introduces a new “opportunity zone” concept to spur certain geographically targeted investment, as follows:
- Historic Preservation and Rehabilitation Tax Credits: The 20% credit for qualified rehabilitation expenditures made to rehabilitate certified historic structures is retained, with the change that the credit must be claimed ratably over a 5-year period. Further, the 10%credit for non-certified structures built before 1936 is eliminated. The House version bill would have eliminated all preservation and rehabilitation credits altogether.
- Low Income Housing Tax Credits (LIHTCs): The LIHTC, a key element of financing in the affordable housing market, was preserved starting with the House version of the legislation on November 16, 2017.
- New Markets Tax Credits (NMTCs): The Act maintains the NMTC though the House bill would have repealed this credit that incentivizes development in distressed areas. Investments in qualified equity investments in a qualified community development entity receive a 5% credit for the year of purchase and two successive years, and then a 6% credit in each of the next four years.
- Private Activity Bonds (PABs): The Act preserves the tax-preferred status of PABs, allowing federal tax exemption on interest payable to holders. PAB tax-exempt status of interest paid to investors would have been terminated under the House bill but was saved by the Conference agreement. PABs may play an important role as a financing mechanism in a future infrastructure bill.
- Qualified Opportunity Zones (QOZs): The Act provides an entirely new tax incentive for investment in economically depressed areas, by allowing the deferral of capital gain that is reinvested, within 180 days of such realization event, in a “qualified opportunity fund” (organized for the purposes of investing in QOZ property). Qualifying investments will be determined by the designation of certain low-income community population census tracts as QOZs, with such designation to last for 10 years. Where an investment in a qualified opportunity fund is held for 10 years, at the election of the QOZ fund investor any resulting gain on disposition will receive a complete exclusion from gross income; the gain exclusion on sale of the QOZ fund interest is available for investments in QOZ funds made before 2027.
- A clear shift in direction of the legislation occurred at the Joint Committee level regarding the fate of several capital markets-related incentives. In the end, the Act retains the status quo in most regards and introduces a new QOZ provision, the potential of which is not yet clear. These provisions should continue to help attract and supplement capital for real estate projects.