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Recently Expired Housing Related Tax
Provisions (“Tax Extenders”): In Brief
Mark P. Keightley
Specialist in Economics
December 9, 2014
Congressional Research Service
7-5700
www.crs.gov
R43449
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Recently Expired Housing Related Tax Provisions (“Tax Extenders”): In Brief
Contents
Introduction ...................................................................................................................................... 1
Tax Exclusion for Canceled Mortgage Debt .................................................................................... 1
Mortgage Insurance Premium Deductibility .................................................................................... 2
Low-Income Housing Tax Credit: The 9% Floor ............................................................................ 3
Low-Income Housing Tax Credit: Treatment of Military Housing Allowance ............................... 5
Contacts
Author Contact Information............................................................................................................. 6
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Recently Expired Housing Related Tax Provisions (“Tax Extenders”): In Brief
Introduction
On December 3, 2014, the House passed the Tax Increase Prevention Act of 2014 (H.R. 5771), a
bill to retroactively extend a set of tax provisions that expired at the end of 2013 through the end
of 2014. On April 3, 2014, the Senate Finance Committee passed the Expiring Provisions
Improvement Reform and Efficiency (EXPIRE; S. 2260) Act, which would also extend a set of
expired tax provisions through the end of 2015. These and other tax provisions that are regularly
extended for one or two years are often referred to as “tax extenders.” This report briefly
summarizes and discusses the economic impact of the four housing related tax provisions
included in H.R. 5771 and S. 2260, which are (1) the tax exclusion for canceled mortgage debt;
(2) the deduction for qualified mortgage insurance premiums; (3) the so-called 4% and 9% low-
income housing tax credit (LIHTC) floors; and (4) the exclusion of military housing allowances
for purposes of the LIHTC program. A fifth provision that recently expired—the tax credit for
energy efficient home construction—arguably fits into the housing-related category. It was
excluded from this report because its objective appears to be more in line with energy policy than
housing policy.
Tax Exclusion for Canceled Mortgage Debt
Historically, when all or part of a taxpayer’s mortgage debt has been forgiven, the amount
canceled has been included in the taxpayer’s gross income.1 This income is typically referred to
as canceled mortgage debt income. The borrower will realize ordinary income to the extent the
canceled mortgage debt exceeds the value of any money or property given to the lender in
exchange for cancelling the debt. Such exchanges are common in a “short sale,” for example.
Lenders report the canceled debt to the Internal Revenue Service (IRS) using Form 1099-C. A
copy of the 1099-C is also sent to the borrower, who in general must include the amount listed in
their gross income in the year of discharge.
It may be helpful to explain why forgiven debt is viewed as income. Income is a measure of the
increase in one’s purchasing power over a designated period of time. When an individual
experiences a reduction in their debts, their purchasing power has increased (because they no
longer have to make payments). Effectively, their disposable income has increased. From an
economic standpoint, it is irrelevant whether a person’s debt was reduced via a direct transfer of
money to the borrower (e.g., wage income) that was then used to pay down the debt, or whether it
was reduced because the lender forgave a portion of the outstanding balance. Both have the same
effect, and thus both are subject to taxation.
The Mortgage Forgiveness Debt Relief Act of 2007 (P.L. 110-142), signed into law on December
20, 2007, temporarily excluded qualified canceled mortgage debt income that is associated with a
primary residence from taxation. Thus, the act allowed taxpayers who did not qualify for one of
several existing exceptions to exclude canceled mortgage debt from gross income. The provision
was originally effective for debt discharged before January 1, 2010. The Emergency Economic
1 Generally, any type of debt that has been canceled is to be included in a taxpayer’s gross income. Several permanent
exceptions to this general tax treatment of canceled debt exist. They are discussed in CRS Report RL34212, Analysis of
the Tax Exclusion for Canceled Mortgage Debt Income, by Mark P. Keightley and Erika K. Lunder.
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Recently Expired Housing Related Tax Provisions (“Tax Extenders”): In Brief
Stabilization Act of 2008 (P.L. 110-343) extended the exclusion of qualified mortgage debt for
debt discharged before January 1, 2013. Most recently, the American Taxpayer Relief Act of 2012
(P.L. 112-240) extended the exclusion through the end of 2013.
The rationales for extending the exclusion are to minimize hardship for households in distress and
lessen the risk that non-tax homeowner retention efforts are thwarted by tax policy. It may also be
argued that extending the exclusion would continue to assist the recoveries of the housing market
and overall economy. Opponents of the exclusion may argue that extending the provision would
make debt forgiveness more attractive for homeowners, which could encourage homeowners to
be less responsible about fulfilling debt obligations. The exclusion may also be viewed as unfair,
as its benefits depend on whether or not a homeowner is able to negotiate a debt cancelation, the
income tax bracket of the taxpayer, and whether or not the taxpayer retains ownership of the
house following the debt cancellation.
The Joint Committee on Taxation (JCT) estimates the 10-year revenue loss associated with
extending this provision through 2014 via H.R. 5771 to be $3.1 billion.2 The JCT estimates the
10-year revenue loss associated with extending this provision through 2015 via S. 2260 to be $5.4
billion.
A more detailed analysis of the canceled debt exclusion can be found in CRS Report RL34212,
Analysis of the Tax Exclusion for Canceled Mortgage Debt Income, by Mark P. Keightley and
Erika K. Lunder.
Mortgage Insurance Premium Deductibility
Traditionally, homeowners have been able to deduct the interest paid on their mortgage, as well as
any property taxes they pay as long as they itemize their tax deductions. Beginning in 2007,
homeowners could also deduct qualifying mortgage insurance premiums as a result of the Tax
Relief and Health Care Act of 2006 (P.L. 109-432). Specifically, homeowners could effectively
treat qualifying mortgage insurance premiums as mortgage interest, thus making the premiums
deductible if the homeowner itemized, and if the homeowner’s adjusted gross income was below
a certain threshold ($55,000 for single, and $110,000 for married filing jointly). Originally, the
deduction was to only be available for 2007, but it was extended through 2010 by the Mortgage
Forgiveness Debt Relief Act of 2007 (P.L. 110-142). The deduction was extended again through
2011 by the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act (P.L.
111-312) and most recently through the end of 2013 by the American Taxpayer Relief Act of 2012
(P.L. 112-240).
Two justifications for allowing the deduction of mortgage insurance premiums are the promotion
of homeownership, and, relatedly, the recovery of the housing market. Homeownership is often
argued to bestow certain benefits to society as a whole, such as higher property values, lower
crime, and higher civic participation, among others. Homeownership may also promote a more
2 All revenue estimates in this report come from U.S. Congress, Joint Committee on Taxation, Estimated Revenue
Effects Of H.R. 5771, The “Tax Increase Prevention Act of 2014,” Scheduled For Consideration By The House Of
Representatives On December 3, 2014, 113th Cong., 2nd sess., December 3, 2014, JCX-107-14R, and U.S. Congress,
Joint Committee on Taxation, Estimated Revenue Effects Of The Chairman’s Modification To The “Expiring
Provisions Improvement Reform And Efficiency Act Of 2014,” Scheduled For Markup By The Committee On Finance
On April 3, 2014, 113th Cong., 2nd sess., April 3, 2014, JCX-32-14.
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Recently Expired Housing Related Tax Provisions (“Tax Extenders”): In Brief
even distribution of income and wealth, as well as establish greater individual financial security.
Last, homeownership may have a positive effect on living conditions, which can lead to a
healthier population.
With regard to the first justification, it is not clear that the deduction for mortgage insurance
premiums has an effect on the homeownership rate. Economists have identified the high
transaction costs associated with a home purchase—mostly resulting from the down payment
requirement, but also closing costs—as the primary barrier to homeownership.3 The ability to
deduct insurance premiums does not lower this barrier—most lenders will require mortgage
insurance if the borrower’s downpayment is less than 20% regardless of whether the premiums
are deductible. The deduction may allow a buyer to borrow more, however, because they can
deduct the higher associated premiums and therefore afford a higher housing payment.
Concerning the second justification, it is also not clear that the deduction for mortgage insurance
premiums is still needed to assist in the recovery of the housing market. Based on the S&P Case-
Shiller National Composite Index, home prices have increased consistently since the first quarter
of 2012, which suggests that the market as a whole is stronger than when the provision was
enacted. Extending the deduction may, however, assist some individuals who are in financial
distress because of burdensome housing payments.
Last, economists have noted that owner-occupied housing is already heavily subsidized via tax
and non-tax programs. To the degree that owner-occupied housing is over subsidized, extending
the deduction for mortgage insurance premiums would lead to a greater misallocation of
resources that are directed toward the housing industry.
The JCT estimates the 10-year revenue loss associated with extending this provision through
2014 via H.R. 5771 to be $0.9 billion. The JCT estimates the 10-year revenue loss associated with
extending this provision through 2015 via S. 2260 to be $1.9 billion.
Low-Income Housing Tax Credit: The 9% Floor
The low-income housing tax credit (LIHTC) was created by the Tax Reform Act of 1986 (P.L. 99-
514) to provide an incentive for the development and rehabilitation of affordable rental housing.
Two types of LIHTCs are available depending on the nature of the rental housing construction:
the so-called 9% credit for new construction, and the so-called 4% credit for rehabilitated housing
and new construction that is financed with tax-exempt bonds. The credits are claimed annually
over 10 years. The credit percentages do not actually equal 9% or 4%. Instead, the credit
percentages are determined by a formula that is intended to ensure that the present value of the
10-year stream of credits equals 70% (new construction) and 30% (rehabilitated construction) of
qualified construction costs. The formula depends in part on interest rates that fluctuate over time,
implying that LIHTC rates fluctuate as well.
3 See for example, Peter D. Linneman and Susan M. Wachter, “The Impacts of Borrowing Constraints,” Journal of the
American Real Estate and Urban Economics Association, vol. 17, no. 4 (Winter 1989), pp. 389-402; Donald R. Haurin,
Patrick H. Hendershott, and Susan M. Wachter, “Borrowing Constraints and the Tenure Choice of Young Households,”
Journal of Housing Research, vol. 8, no. 2 (1997), pp. 137-154; and Mathew Chambers, Carlos Garriga, and Donald
Schlagenhauf, “Accounting for Changes in the Homeownership Rate,” International Economic Review, vol. 50, no. 3
(August 2009), pp. 677-726.
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The Housing and Economic Recovery Act of 2008 (P.L. 110-289) temporarily changed the credit
rate formula used for new construction. The act effectively placed a floor equal to 9% on the new
construction tax credit rate. The 9% credit rate floor originally only applied to new construction
placed in service before December 31, 2013. The 4% tax credit rate that is applied to
rehabilitation construction or new construction jointly financed with tax-exempt bonds remained
unaltered by the act. Most recently, the American Taxpayer Relief Act of 2012 (P.L. 112-240)
extended the 9% floor for credit allocations made to housing developers before January 1, 2014.
H.R. 5771 and S. 2260 would extend the 9% floor. S. 2260 would also introduce a 4% tax credit
floor.
Historically, relatively low interest rates have resulted in the LIHTC rates being below the 4%
and 9% thresholds. Because low interest rates persist, the floors would result in subsidies in
excess of 30% and 70%. Specifically, the 4% floor would have resulted in a 37% subsidy and the
9% floor would have resulted in an 84% subsidy had they been in place as of the time of this
writing (December 2014).
The floors on the credit rates address a concern among some LIHTC participants—that the
variable rate method for determining the LIHTC rates discourages some investment because of
the uncertainty it introduces over what the final credit rate for a particular project will be. The
floors also indirectly address a potential problem in the original formula used for determining the
variable credit rates. The original formula was designed to ensure that when the 10-year stream of
tax credits is discounted, the present value subsidies of 30% or 70% are achieved. However, the
interest rate used to discount the tax credit streams is based on U.S. Treasury yields, which are
generally viewed as risk-free. Investing in LIHTCs is not risk-free, which suggests that the
interest rate used to compute the subsidy levels should be higher than the yield on U.S.
Treasuries. Using a higher discount rate would result in higher LIHTC rates to achieve the 30%
and 70% subsidies. The floors may result in credit rates that are closer to what using a higher
discount rate would achieve.
At the same time, the floors may lead to fewer projects receiving funding. A fixed number of
credits are made available each year on a per capita basis, or in the case of the 4% credit are
limited by a state’s tax-exempt bond capacity. If the total number of credits available does not
change, but the number of credits each particular project receives is higher because of the floors,
then fewer projects may get financing. Additionally, there may be better options for addressing
issues about the LIHTC program. Specifically, the target subsidy levels of 30% and 70% could be
increased, while still requiring that the variable rate formula for determining credits be used. This
could be combined with a requirement that the discount rate used in the formula more accurately
reflects the risk of investing in LIHTC.
The JCT estimates the 10-year revenue loss associated with extending this provision through
2014 via H.R. 5771 to be less than $500,000. The JCT estimates the 10-year revenue loss
associated with extending this provision through 2015 via S. 2260 to be $49 million.
For more information on the LIHTC program, see CRS Report RS22389, An Introduction to the
Low-Income Housing Tax Credit, by Mark P. Keightley and Jeffrey M. Stupak; and CRS Report
RS22917, The Low-Income Housing Tax Credit Program: The Fixed Subsidy and Variable Rate,
by Mark P. Keightley and Jeffrey M. Stupak.
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Recently Expired Housing Related Tax Provisions (“Tax Extenders”): In Brief
Low-Income Housing Tax Credit: Treatment of
Military Housing Allowance
Tenants must have an income below a particular threshold to live in a LIHTC unit.4 Specifically, a
tenant must have an income of either 50% or less of the area’s median income, or 60% or less of
the area’s median income. Which threshold applies depends on an election made by the developer
that determines the targeted low-income population. Civilians as well as servicemembers are
potentially eligible to live in LIHTC units. However, when calculating a servicemember’s income
for purposes of determining their eligibility, their annual pay and basic allowance for housing
(BAH) must be included. The BAH is a tax-exempt form of compensation that is based on a
servicemember’s pay grade, location, and number of dependents.
The Housing and Economic Recovery Act of 2008 (P.L. 110-289) temporarily excluded military
housing allowances from the LIHTC income calculations for properties near rapidly growing
military bases. This, in turn, should make more servicemembers eligible to live in LIHTC
housing. The exclusion applies to LIHTC properties in a county with a military base that
experienced military personnel growth of 20% or more between December 31, 2005, and June 1,
2008, or that are located in an adjacent county. The HERA change was originally set to expire on
December 31, 2011, but was extended through the end of 2013 by the American Taxpayer Relief
Act of 2012 (P.L. 112-240).
The exclusion may help address a concern, held by some, that there is a lack of affordable
housing near particular military bases. The exclusion increases the incentive for the development
of affordable rental housing available to military families in these locations, and, as a result, may
alleviate rising rents near particular military bases. A 2005 Government Accountability Office
report, however, suggests that the exclusion may have limited effect for several reasons.5 First,
junior enlisted servicemembers and those without dependents typically live in barracks. Second,
housing allowances are already intended to cover the area median cost of living, and are adjusted
for changes in area rents. Third, Department of Defense officials can increase housing allowances
if warranted. In addition, the exclusion could have the unintended consequence of displacing the
construction of LIHTC properties for civilians.
The JCT estimates the 10-year revenue loss associated with extending this provision through
2014 via H.R. 5771 to be less than $500,000. The JCT estimates the 10-year revenue loss
associated with extending this provision through 2015 via S. 2260 to be $49 million.
4 A LIHTC property may be composed of both affordable rental units and market-rate rental units. However, only the
costs associated with the affordable rental units may be offset with tax credits.
5 U.S. Government Accountability Office, Rental Housing Programs: Excluding Servicemembers’ Housing Allowance
from Income Determinations Would Increase Eligibility, but Other Factors May Limit Program Use, GAO-06-784,
July 2006, http://www.gao.gov/assets/260/250986.pdf.
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Recently Expired Housing Related Tax Provisions (“Tax Extenders”): In Brief
Author Contact Information
Mark P. Keightley
Specialist in Economics
mkeightley@crs.loc.gov, 7-1049
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