As Congress looks to wrap up its work for 2015, a bipartisan agreement was reached on two key pieces of legislation: an omnibus spending bill to fund the federal government and a more than $600 billion bipartisan tax bill that extends a number of tax policies, including some related to housing, construction and real estate. Some extensions are made on a permanent basis, and many of the changes are retroactive for 2015.
Given the importance of these programs, the tax bill offers good news for the housing industry as we head into 2016.
The following extensions are part of the legislation:
- Deduction for Mortgage Insurance. Allows taxpayers, subject to an income cap beginning at $100,000, to deduct premiums paid for private mortgage insurance and FHA/RHA/VA insurance premiums. The deduction is extended through the end of 2016 and is expected to save homeowners $1.3 billion for tax year 2015.
- Section 45L Tax Credit for Energy Efficient New Homes. Provides builders a $2,000 tax credit for the construction of homes exceeding heating and cooling energy standards by 50%. The base energy code is the 2006 International Energy Conservation Code plus supplements. Builders must have tax basis in the home to claim the credit (i.e. must own and then sell/lease the residence). Section 45L is expected to save home builders $361 million in taxes for tax year 2015.
- Makes Permanent the Fixed Credit Rate for 9% Low Income Housing Tax Credit projects. The bill makes permanent the 9% LIHTC fixed rate, which simplifies the housing credit program. The permanent 9% rate will provide builders certainty and improve the flow of equity into developments. This is a significant victory for the affordable housing community.
- Section 179 Small Business Expensing. Permanently extends small business expensing limitation and phase-out amounts for Section 179. Current law allows small businesses to immediately write off $25,000 of qualifying property, which is phased out for total investments above $200,000. The bill increases the expensing limit to $500,000 with a $2 million phase-out and indexes both for inflation. The bill also allows HVAC systems placed in service after 2015 to be eligible for expensing.
- Section 25C Tax Credit for Qualified Energy Efficiency Improvements. This policy offers a credit worth up to $500 (subject to a $500 lifetime cap), with lower caps for certain products like windows, for consumers to install qualified energy-efficient upgrades. The credit is extended through 2016, with some updates for qualifying requirements. Remodelers often leverage 25C tax credits when working with clients. Section 25C is expected to save home owners who remodel $826 million in taxes for tax year 2015.
- Section 25D Tax Credit for Power Production Property. This program offers a 30% tax credit for the installation of solar panels, wind turbines, geothermal heat pumps and fuel cells in new or existing homes. The legislation extends the solar tax credit through 2021, although under a new phase-out regime. The 30% credit becomes a 26% credit in 2020, a 22% credit in 2021, and then expires. Section 25D is expected to save home owners $869 million for tax year 2017 (under prior law the credit was scheduled to expired at the end of 2016).
- Mortgage Forgiveness Tax Relief. The provision eliminates any taxes home owners might face due to renegotiating the terms of a home loan, which result in forgiving or canceling a portion of the outstanding mortgage, particularly in connection with short sales. It applies only to principal residences and is extended for 2015 and 2016. The exclusion is also modified to debt discharged in 2017 if the discharge is pursuant to a written agreement entered into in 2016. This extension is expected to save home owners $3.3 billion for tax year 2015.
- Section 179D Energy Efficient Commercial Buildings Deduction. Provides a deduction up to $1.80 per square foot for commercial buildings, including multifamily buildings, that exceed specific energy efficiency requirements under ASHRAE 2007. The legislation extends the deduction through 2016 and modifies the qualifying requirements.
- Bonus Depreciation. Extends and phases-out bonus depreciation (partial expensing) for property acquired and placed in service during 2015 through 2019. The bonus depreciation percentage is 50% for property placed in service in 2015, 2016, and 2017, dropping to 40% in 2018 and 30% in 2019. Bonus depreciation applies to qualified property with a recovery period of 20 years or less.
Other notable tax changes in the bill include a five-year extension of the New Markets Tax Credit program and a permanent extension of the state and local sales tax deduction (claimed in lieu of the income tax deduction).
Finally, it is also worth noting that compared to past years, when the “tax extenders” legislation typically offered just two-year extensions, this legislation makes some policies permanent. Combined with a prior bill that made a permanent fix to the AMT rules, this legislation will change the political dynamic regarding future extension efforts. It can also be seen as a step forward for tax reform by adding some tax rules to the present law baseline.
Be sure to check with your tax professional regarding the details of these policies. The above descriptions are offered as general descriptions only and do not constitute tax or legal advice.