Exclusion of gain from sales of affordable housing which is attributable to depreciation

(a)

In general

Part I of subchapter P of chapter 1 of the Internal Revenue Code of 1986 (relating to treatment of capital gains) is amended by inserting after section 1202 the following new section:

1203.

Exclusion of gain from qualified sales of multifamily housing

(a)

In general

Gross income shall not include gain from the qualified sale or exchange of eligible multifamily housing property. (b)

Exclusion limited to depreciation

The amount of gain excluded from gross income under subsection (a) with respect to any property shall not exceed the depreciation adjustments (as defined in section 1250(b)(3)) in respect of such property. (c)

Qualified sale or exchange

For purposes of this section— (1)

In general

The term qualified sale or exchange means a sale of eligible multifamily housing property to or an exchange of such property with a preservation entity which agrees to maintain affordability and use restrictions regarding the property that are— (A)for a term of not less than the extended use period, (B)legally enforceable, and (C)consistent with the requirements of paragraph (2).

Such restrictions shall be binding on all successors of the preservation entity and shall be recorded as a restrictive covenant on the property pursuant to State law.

(2)

Affordability and use restrictions

(A)

In general

Affordability and use restrictions regarding a property are consistent with this paragraph if— (i)in the case of property with respect to which assistance described in subsection (d) is still in effect (as determined by the Secretary), such property satisfies the affordability and use restrictions in connection with such assistance, or (ii)in the case of any other property, such property is maintained as affordable housing. (B)

Affordable housing

The term affordable housing means housing which would be a qualified low-income housing project (as defined in section 42(g)) if subparagraph (A) of section 42(g)(1) did not apply and subparagraph (B) of such section were applied by substituting 51 percent for 40 percent. Eligible multifamily housing property shall not fail to be treated as affordable housing solely because residents of such property (while such property was described in subparagraph (A)(i)) continue to reside in such property. (3)

Certification by program administrator

The term qualified sale or exchange shall not include any sale or exchange of property unless the housing credit agency certifies— (A)that the transferee with respect to such property is a qualified preservation entity, (B)that affordability and use restrictions will be maintained with respect to such property during the extended use period, and (C)the amount of gain which the transferor will be allowed to exclude from gross income under subsection (a) (determined at the entity level in the case of a partnership or S corporation). (4)

Extended use period

The term extended use period means the period beginning on the date of sale and ending on the earlier of— (A)30 years after the close of the sale, or (B)the date that the property is acquired by foreclosure (or instrument in lieu of foreclosure).

Subparagraph (B) shall not apply if the Secretary determines that the acquisition described therein is part of an arrangement with the owner a purpose of which is to terminate the extended use period.

(d)

Eligible multifamily housing property

For purposes of this section, the term eligible multifamily housing property means any section 1250 property (as defined in section 1250(c))— (1)which is assisted under section 221(d)(3) or section 236 of the National Housing Act (or financed or assisted by direct loan or tax abatement under similar provisions of State or local laws) and with respect to which the owner is subject to the restrictions described in section 1039(b)(1)(B) (as in effect on the day before the date of the enactment of the Revenue Reconciliation Act of 1990), (2)which is described in section 512(2)(B) of the Multifamily Assisted Housing Reform and Affordability Act of 1997 (42 U.S.C. 1437f note), (3)with respect to which a loan is made or insured under title V of the Housing Act of 1949, or (4)which either received an allocation of low-income housing tax credit pursuant to paragraph (1) of section 42(h) or was exempted from such paragraph by paragraph (4) of such section. (e)

Preservation entity

For purposes of this section, the term preservation entity means a housing credit agency or an organization approved by a housing credit agency that has the capacity and commitment to successfully acquire and preserve eligible multifamily housing property. An organization shall not be treated as a preservation entity with respect to any taxpayer if such organization is related (as defined in section 267) to such taxpayer. (f)

Responsibilities of housing credit agency

The housing credit agency (or an agent or other private contractor of such agency) shall— (1)determine whether the preservation entity’s plan for rehabilitation (if any) and operation of the eligible multifamily housing property is viable for no less than 30 years, (2)monitor the affordability and use restrictions for the eligible multifamily housing property, and (3)notify the Internal Revenue Service as to any portion of such property which is out of compliance. (g)

Recapture for noncompliance

If the Secretary determines that all or a portion of the multifamily housing property acquired by a preservation entity in a transfer to which subsection (a) applied is out of compliance with the requirements of this section, the preservation entity’s tax imposed under this chapter for the taxable year shall be increased by (or if such entity is not otherwise subject to tax under this chapter, there shall be imposed on such entity a tax equal to) 12.5 percent of the amount which bears the same ratio to the amount certified under subsection (c)(3)(C) with respect to such property as such entity’s share of the portion of such property which is out of compliance bears to the entire property. The amount otherwise determined under this subsection (without regard to this sentence) shall be reduced by the product of 3.33% of such amount, multiplied by the number of years after the qualified sale or exchange that the property was in compliance with the requirements of this section. (h)

Coordination with section 1250

In the case of a qualified sale or exchange of eligible multifamily housing property a portion of the gain from which is treated as ordinary income under section 1250, such portion of the gain shall be excluded from gross income under subsection (a) before any remaining portion of such gain.

(b)

Application of 25 percent capital gains rate

Clause (i) of section 1(h)(6)(A) of the Internal Revenue Code of 1986 is amended to read as follows:

(i)the sum of— (I)the amount of long-term capital gain (not otherwise treated as ordinary income) which would be treated as ordinary income if section 1250(b)(1) included all depreciation and the applicable percentage under section 1250(a) were 100 percent, and (II)the amount of long-term capital gain (not otherwise excluded from gross income) which would be excluded from gross income under section 1203 if subsection (b) thereof did not apply, over

(c)

Conforming amendments

(1)Subparagraph (B) of section 172(d)(2) of the Internal Revenue Code of 1986 is amended by striking section 1202 and inserting section 1202 and 1203. (2)Paragraph (4) of section 642(c) of such Code is amended by striking the first sentence and inserting the following: To the extent that the amount otherwise allowable as a deduction under this subsection consists of gain described in section 1202(a) or 1203(a)), proper adjustment shall be made for any exclusion allowable to the estate or trust under section 1202 or section 1203, as the case may be. (3)Paragraph (3) of section 643(a) of such Code is amended by striking section 1202 and inserting sections 1202 and 1203. (4)Paragraph (4) of section 691(c) of such Code is amended by inserting 1203, after 1202,. (5)Paragraph (2) of section 871(a) of such Code is amended by inserting and 1203 after section 1202. (6)The table of sections for part I of subchapter P of chapter 1 of such Code is amended by inserting after the item relating to section 1202 the following new item:

Sec. 1203. Exclusion of gain from qualified sales of multifamily housing

(d)

Effective date

The amendments made by this section shall apply to taxable years beginning after December 31, 2005.