The principal state tax credit that supports housing production is the state Low Income Housing Tax Credit, discussed in a previous post. There are several additional relevant state credits. These credits are all smaller in impact than the LIHTC. This post reviews those credits and also identifies other housing related tax expenditures.
Summary of funding impact for housing production from state tax credits
| Credit | FY25-29 ($millions)* |
|---|---|
| Low income housing | $1,200 for low/moderate income |
| Commercial conversion | Unknown. Likely small.** |
| Historic rehabilitation | Negligible |
| Community investment | Negligible |
| Homeownership | $40 for middle income |
| Certified housing development | $120 for market rate |
| Total | Mostly from the state LIHTC |
** This program may take off and produce a larger impact, but the F25-29 period will reflect its early years of growth.
Commercial Conversion Tax Credit
The Affordable Homes Act requires the Executive Office of Housing and Livable Communities (“HLC”) to establish a program “to assist in the conversion of commercial properties into residential properties.” The Act authorizes but does not fund grants for this purpose. It does authorize the commercial conversion tax credit that will support the program goals.
The HLC program is supported by an already existing technical assistance program offered by Mass Housing for commercial conversions. The program specifically places a focus on conversion of downtown commercial buildings into market rate housing, defining a qualified conversion project as follows:
the rehabilitation of a commercial property, . . . located on main streets or downtown municipal areas, for primary multi-unit residential use or mixed-use, which may include retail or other commercial uses, that: (i) contains not less than 2 residential units; . . . (ii) contains at least 80 per cent market rate residential units ; (iii) prior to conversion, such building was nonresidential real property, . . . (iv) such building was initially placed in service at least 5 years before the beginning of the conversion.
New Section 36 of Chapter 23B of the General Laws (as of this writing not yet reflected in that chapter on line), added by Section 5 of the Affordable Homes Act. The credits are further specified in sections 17 and 26 of the Affordable Homes Act.
The Act directs HLC to administer a tax credit program, awarding credits up to 10% of the development costs (excluding acquisition costs) for qualified projects. Unlike the LIHTC which repeats over several years, this is a one-time credit in the year that the project is placed in service.
The Act gives HLC great flexibility to condition the availability and amount of the credit on policy goals.
The amount of the credit awarded shall be based on the following factors: (i) the need for residential development and diversity of housing supply in the municipality; (ii) the extent to which the certified qualified conversion project will encourage residential development, expansion of diversity of housing supply, support neighborhood stabilization and promote economic development in the zone; and (iii) the percentage of market rate residential units contained in the certified qualified conversion project. The executive office may limit a credit available to a certified qualified conversion project under subsection (ee) of section 6 of chapter 62 and section 38OO of chapter 63 to a dollar amount or in any other manner deemed appropriate by the executive office.
New Section 36 of Chapter 23B of the General Laws (as of this writing not yet reflected in that chapter on line), added by Section 5 of the Affordable Homes Act (emphasis added). The credits are further specified in sections 17 and 26 of the Affordable Homes Act.
The new credit requires a minimum of 80 percent market rate housing, but if the other 20% of the units are affordable, HLC may find ways to make them eligible for various subsidy programs. HLC also has the flexibility to condition the credit on inclusion of 20% affordable units.
The ultimate scale of this tax credit program is unknown. There is no Massachusetts precedent for it. However, the language gives HLC the flexibility necessary to manage it to maximize housing production and control fiscal impact. All aspects of the program sunset in 2030.
Historical Rehabilitation Tax Credit
The Affordable Homes Act expands the existing historical rehabilitation tax credit in two ways: (a) It extends the credit from 2027 to 2030 and (b) doubles the annually available amount of the credit from $55 million to $110 million.
The historical rehabilitation tax credit covers up to 20% of the costs of qualified rehabilitation expenditures on qualified historic structures. Credits are awarded by the Massachusetts Historic Commission. Credit eligible projects are by regulation (830 CMR 63) required to meet historic rehabilitation standards set by the national secretary of the Interior. These standards are very specific and require a high degree of respect for the original historic structure.
The credit applies to “any building or structure”, not just housing, but is only available for recognized historic structures, which are defined as:
any building or structure, located within the commonwealth that is individually listed on the National Register of Historic Places or is a contributing building within a district that is listed on the National Register of Historic Places or which has been determined by the Massachusetts historical commission to be eligible for listing on the National Register of Historic Places, and which all or any portion of which is owned, in whole or in part, by the taxpayer.
General Laws, Chapter 63, Section 32R, see also G.L. Chapter 62, Section 6J.
Although the authorizing statutes do require that a portion of projects be awarded to affordable housing, this requirement is not further defined and is made subordinate to the proposal mix and to preservation standards:
The Massachusetts historical commission shall determine the criteria for eligibility for the credit, such criteria to be set forth in regulations promulgated under this section; but, at least 25 per cent of the tax credits shall be allowed to projects that contain affordable housing whenever possible and consistent with such criteria;
General Laws, Chapter 63, Section 32R (emphasis added), see also G.L. Chapter 62, Section 6J.
The impact of doubling the available amount for the credit is uncertain. Advocates argued for the increase arguing that there were projects that were unable to attain the credit, but this may in part reflect the appropriately high standards for issuance of the credit. The credit is available to both corporate and individual taxpayers and has been running under an annual combined cap of $55 million since tax year 2018. However, according to the reported tax expenditures for individual and corporate taxpayers combined has not exceeded $40 million in any of the last four years.
The goal of the historic rehabilitation tax credit is historic preservation not housing production. Given the track record of limited spending, the very specific focus on historic preservation, and the spread of eligibility for the credit across multiple building types that are not housing (and likely cannot be converted to housing in an historically authentic way), we should not expect the increase in the rehabilitation tax credit to materially impact housing production.
Community Investment Tax Credit
The Affordable Homes Act (Sections 20 and 25) expands the Community Investment Tax Credit (“CITC”) availability from $12,000,000 to $16,000,000 in tax year 2025 and so limits it in future years.
The CITC is awarded by Housing and Livable Communities (“HLC”) to Community Development Corporations (CDC). A CDC is a non-profit entity organized under Chapter 40H of the General Laws to serve the following goals.
(a) focuses a substantial majority of the corporation’s efforts on serving 1 or more specific neighborhoods or municipalities, a region of the commonwealth or a constituency that is economically disadvantaged;
(b) has as the corporation’s purpose to engage local residents and businesses to work together to undertake community development programs, projects and activities which develop and improve urban, rural and suburban communities in sustainable ways that create and expand economic opportunities for low and moderate income people;
(c) demonstrates to the executive office of housing and livable communities that the corporation’s constituency, including low and moderate income people, is meaningfully represented on the board of directors of the corporation; . . .
General Laws Chapter 40H, Section 2
The Community Investment Tax Credit supports a CDC in implementing a Community Investment Plan. The CITC is awarded by HLC to CDCs (and other community organizations approved by HLC) who are then able to pass the credit through to donors who support the CDC’s Community Investment Plan.
. . . the plan shall be designed to engage local residents and businesses to work together to undertake community development programs, projects and activities which develop and improve urban, rural or suburban communities in sustainable ways that create and expand economic opportunities for low and moderate income households; . . .
GL Chapter 63, Section 38EE (Corporate), see also GL Chapter 62, 6M (Individual)
This complex arrangement serves community goals which include affordable housing development, but also include community improvement and economic opportunity very broadly. Supporting CDCs in their broad efforts contributes to affordable housing development, but not in a quantifiable way. HLC made the following conjecture:
EOHLC assumed that approximately 50% of the CITC funds would be directed to predevelopment activities, reducing the cost of development by a comparable amount. This could enable the creation of an additional 107 affordable units.
Affordable Homes Act Research and Analysis (as of August 29, 2024)
The 107 affordable units is computed as 50% of the new cap ($15,000,000) multiplied by 5 years divided by $350,000 (the subsidy component of an average affordable unit blending rehab and new construction used by HLC elsewhere on the same page). The CITC is small in scale and only tenuously connected to housing production; it should be considered negligible in the larger picture of housing production over the next five years.
Homeownership Tax Credit
The Affordable Homes Act (Sections 21 and 26) creates a new Homeownership Tax Credit (“HTC”) for new home development projects in which 20% of the homes are affordable for purchase by people at 120% of the area median income.
The HTC is awarded to a sponsor of a qualified homeownership development project, defined as:
a project to develop for sale single-family dwellings in the commonwealth that . . . (i) involve the new construction of not less than 10 single-family dwellings; (ii) be located in an eligible location; and (iii) result in not less than 20 per cent of the single-family dwellings being sold to qualified buyers, subject to an affordability restriction in accordance with the qualified homeownership credit allocation plan.
Affordable Homes Act (Sections 21 and 26, respectively individual and corporate tax credits)
A qualified buyer is “a first-time homebuyer with an annual income not exceeding 120 per cent of the area median income.” The affordability restriction must be preserved for 10 years.
The tax credit is to be administered by the director of the Massachusetts Housing Finance Agency, now known as MassHousing. MassHousing helps individual home buyers with affordable mortgages and downpayment assistance and also administers programs to develop middle income rental and ownership housing. The new HTC will work in conjunction with the Commonwealth Builder program, Mass Housing’s program to subsidize the development of homes affordable to middle income home buyers. Over five years, $50 million in credits will be provided, yielding perhaps $40 million in useable equity for housing developers after discounting in the sale of the credits. This will be combined with $100 million in bond-funded subsidy also provided in the Affordable Homes Act.
HLC in its Affordable Homes Act Research and Analysis page (as of August 29, 2024) uses two different numbers for the per unit subsidy in middle income construction: $100,000 for the credit and $250,000 for the bond-funded subsidy. It would appear that it makes most sense to consider the two programs as one program costing $150,000,000 over the next five years and to use the more conservative $250,000 per unit subsidy cost recommended by MassHousing. This approach leads to an estimated combined production of $140,000,000/$250,000 or 560 homes affordable to middle income buyers.
The tax credit program is funded for tax years 2025 through 2029; only any leftover credits are awardable after that date.
Certified Housing Development Credit
The Certified Housing Development Credit (“CHDC”) is a component of the Housing Development Incentive Program (“HDIP”). HDIP is designed to support market rate housing development in gateway cities. Gateway cities are legally defined as cities from 35,000 to 250,000 in population that have below median income and below median rate of educational attainment. See HLC list here.
The Housing Development Incentive Program was created by the Economic Development Act of 2010 and is codified as Chapter 40V of the General Laws. It is further detailed in HLC regulations. Essentially, cities can apply to HLC to designate certain neighborhoods as housing development zones. In these zones, the cities can, with further specific approval of HLC, negotiate partial property tax exemptions for housing developers seeking to develop multi-family projects including 80% or more market rate units. After approving a local property tax exemption, HLC may then also award the Certified Housing Development Credit for up to 25% of the qualified development cost. The CHDC is transferable to both corporate (G.L. chapter 63, 38BB) and individual (G.L. Chapter 62, s.6(q) taxpayers. While the HDIP focuses on multifamily development that include primarily market rate units, market rents are so low in the targeted neighborhoods that market rental income is often insufficient to support development without subsidy.
The Certified Housing Development Credit was created along with the HDIP program in 2010. It was originally authorized at $5,000,000 per year. In the 2014 economic development bill, the authorization was raised to $10,000,000 for tax year 2015 through 2018. In the 2023 economic development bill, the annual cap was raised to $30,000,000 with a one year bump to $57,000,000 in tax year 2023. Over the FY25-29 period, this program will contribute a total of $150,000,000 in tax credits for market rate projects.
Assuming 20% discounting in the tax credit marketing process (as for the state LIHTC), this will work out to $120,000,000 in equity for developers. Translating $120,000,000 for housing into a production estimate requires a cost per unit. In its Affordable Homes Act Research and Analysis page (as of August 29, 2024) develops an estimate using same $250,000 per unit that it uses for middle-income homeowner construction. This per-unit subsidy could be low because units in hard-hit gateway city neighborhoods may need more subsidy. Additionally, many of the projects may rehabilitate units, raising quality, but not increasing unit count. $120,000,000 divided by $250,000 or 480 units gives an estimate for production attributable to the CHDC in the FY25-29 period. If it is possible for developers to use the credits themselves and avoid the costs of tax credit marketing, the yield could be higher — 600 units.
Additional Tax Expenditures for Housing
Our tax expenditure budget recognizes the following additional tax expenditures that tend to support housing production by making ownership and transfer of property less expensive. These are not directly allocated by any agency, but rather are built into the accounting concepts applied in state income taxation which incorporates many federal income taxation concepts without adjustment.
FY25 tax expenditures that support housing
| Tax Expenditure | FY25 Estimate ($ millions) |
|---|---|
| Accelerated depreciation for rental housing (corporate) | 7.5 |
| Accelerated depreciation for rental housing (individual) | 25.1 |
| Exemption of Capital Gains on Home Sales (individual) | 435.5 |
| Exemption of Rental Value of Parsonages (individual) | 4.3 |
| Rent Deduction (individual) | 198.4 |
| Deduction for renovating abandoned buildings (both) | Negligible |
| Home mortgage interest deduction — not treated as a tax expenditure in our budget* | $500 to $1,000? |
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