SECTION 1. SHORT TITLE.

    This Act may be cited as the ``Affordable Housing Preservation Act 
of 2006''.

SEC. 2. 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:

``SEC. 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 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,
                    ``(C) that new capital will be expended that 
                restores the condition of the property and funds 
                adequate reserves, and
                    ``(D) 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), or
            ``(3) with respect to which a loan is made or insured under 
        title V of the Housing Act of 1949.
Such term does not include any property with respect to which a credit 
under section 42 was allowed to the taxpayer.
    ``(e) Preservation Entity.--For purposes of this section, the term 
`preservation entity' means a housing agency or an organization 
approved by a housing 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 Agency.--The housing agency (or 
an agent or other private contractor of such agency) shall--
            ``(1) determine whether the preservation entity's plan for 
        rehabilitation and operation restores the condition of the 
        eligible multifamily housing property and 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 percent 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.
    ``(i) Housing Agency.--For purposes of this section, the term 
`housing agency' means, with respect to any eligible multifamily 
housing property, the State housing agency (or in the absence of a 
State housing agency, any Federal housing agency) which administers 
housing assistance with respect to such property.''.
    (b) 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.''.
    (c) Effective Date.--The amendments made by this section shall 
apply to taxable years beginning after December 31, 2005.
Affordable Housing Preservation Act of 2006 - Amends the Internal Revenue to exclude from gross income gain from the sale or exchange of certain multifamily housing property to a housing agency or related organization (preservation entity) that agrees to maintain certain affordability and use restrictions for such property. Limits the excludable amount of such gain to the depreciation adjustments for such property.
A bill to amend the Internal Revenue Code of 1986 to provide an incentive to preserve affordable housing in multifamily housing units which are sold or exchanged.