In a bid to meet an ever-increasing housing demand, The Housing Opportunities and Preservation Enhancement (HOPE) Act has been introduced in Congress to entice private investment for the rehabilitation of affordable housing. The intention is to make smaller rehabilitation projects more attractive to private investment by offering tax benefits to individual investors. The residential rental properties that would be impacted must be at least 15 years old and can be used in conjunction with Low-Income Housing Tax Credits, which stop being issued after a property is in service for 15 years.
The bill’s tax benefits depend on private investors partnering with government agencies, non-profit organizations, public housing authorities or trial entities, where the entities mentioned serve as the managing member. Additionally, the properties would need to be at least 15 years old and undergo significant rehabilitation, with the rehabilitation exceeding 20% of the building’s adjusted basis. Once rehabilitated and placed in service, the bill states that a non-profit or government agency has a right of first refusal to purchase the property after a 10-year period, with the purchase price listed below market value. Lastly, once the rehabilitated property is placed in service, at least 70% of the rental units must be rent-restricted to families earning 80% or less of the median income for the property’s geographic area.
For private investors, the bill’s tax benefits would include a 15-year depreciation recovery period, allowing greater tax deductions. Additionally, participation in projects that qualify under the HOPE Act would exempt investors from the passive activity loss rules, allowing investors who may otherwise be passive for real estate purposes to deduct their investment losses against other active income.
While the HOPE Act is still in its introductory phases, it continues the trend of Congress attempting to address the housing shortage through the tax code. By exempting private investors from the passive activity loss rules under IRC section 469, the HOPE Act would have widespread appeal beyond experienced real estate investors looking to offset other active income. Although numerous tax benefits already exist to entice traditional real estate investors, the exemption from the passive activity loss rules would be useful as a tax-planning strategy for individuals who otherwise cannot use real estate losses. As currently written, the HOPE Act would provide the most useful tax benefit for private investors without real estate investment experience and allow for easy entry into the real estate market.
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