Consolidated Appropriations Act of 2020 Favorable to Real Estate Industry
In the 5,593-page Consolidated Appropriations Act of 2020 (the Act), there are several provisions which impact the real estate industry. To the satisfaction of many real estate investors, all the changes either result in favorable deductions, prevent credits from expiring, or allow the credits to be worth more starting in 2021.
Section 201 – Minimum Low-Income Housing Tax Credit Rate
The most significant change in the Act relates to the 4% minimum credit rate for the Low Income Housing Tax Credit (LIHTC). In prior years, if a building was renovated or newly constructed and financed with tax-exempt bonds, the LIHTC was generally equal to 30% of the present value of the project’s qualified basis. This means when interest rates fall to all-time lows, LIHTC’s are worth less. With a 4% minimum LIHTC rate, future LIHTC’s will be worth more to real estate investors.
Section 112 – New Markets Tax Credit
The Act also included a provision to extend the New Markets Tax Credit (NMTC). This credit was established in 2000 and provides an incentive for investment in low-income communities. It was scheduled to sunset in 2020. The Act extended this credit for 5 years through 2025.
Section 146 – Energy Efficient Homes Credit
Like the New Markets Tax Credit, the Energy Efficient Homes Credit (45L Credit) was set to expire in 2020 and was extended through 2021. The 45L credit allows a $2,000 credit for each energy efficient dwelling unit and can be used in combination with the LIHTC.
Section 202 – Depreciation of certain residential rental property over a 30-year period
The Act also provides favorable provisions relating to the depreciation of residential rental property. For taxpayers who previously elected out of IRC Section 163(j) by making the real property trade or business election, residential rental property placed in service before January 1, 2018 is now allowed to be depreciated using Alternative Depreciation System (ADS) over 30 years. Prior to the Act, this same residential rental property was required to be depreciated using ADS over 40 years.
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