Tax Incentives

Government, at any level, sometimes seeks to enhance the amount of investment being applied to some sectors of the economy. If the government sees that insufficient amounts of housing are being built, it may decide to cause more investment dollars to flow into housing development. The means through which the government causes these investment dollars to flow into the areas of need may vary. Government may provide a direct subsidy, or it may offer indirect incentives through the use of tax benefits. Direct subsidy is the expenditure of public funds to address a specific need such as when the federal government gives funds to local housing authorities to run public housing. Tax incentives are elements of the tax laws that reduce the taxes owed by a taxpayer. This reduction comes as compensation for the taxpayer investing in certain types of projects deemed to be in the public interest. For example, a taxpayer who invests in affordable rental housing for low-income families may be able to claim the Low-Income Housing Tax Credit, reducing the amount of taxes otherwise owed to the government. Many types of tax incentives are given for housing activities, ranging from the commonplace to the esoteric. For example, a well-known and popular federal tax incentive is the one permitting each owner-occupant of a home to deduct, for income tax purposes, the interest payments on home purchase loans as well as property taxes paid on the [Page 730]home. A less well-known form of tax incentive is the Low-Income Housing Tax Credit given to the owners of select rental properties occupied by low- or moderate-income households.

However, despite the broad range of tax incentives that exist in housing at all levels of government, federal income tax incentives command the most attention within the housing investment community. These tax incentives fall into three categories: deductions, capital gains treatment, and tax credits.