DESCRIPTION OF THE 

“KATRINA HOUSING TAX RELIEF ACT OF 2007” 

Scheduled for Markup 

By the 

HOUSE COMMITTEE ON WAYS AND MEANS 

on March 21, 2007 

 

Prepared by the Staff 

of the 

JOINT COMMITTEE ON TAXATION 

 

March 19, 2007 

JCX-12-07
i 

CONTENTS 

Page

INTRODUCTION .......................................................................................................................... 1 

A. Extension and Expansion of Low-Income Housing Credit Rules for Buildings in the 

GO Zones............................................................................................................................ 2 

B. Special Tax-Exempt Bond Financing Rule for Repairs and Reconstructions of 

Residences in the GO Zones............................................................................................... 6 
1

INTRODUCTION 

The House Committee on Ways & Means has scheduled a markup on March 21, 2007. 

This document,1 prepared by the staff of the Joint Committee on Taxation, provides a description 

of the “Katrina Housing Tax Relief Act of 2007.” 

 

 1

 This document may be cited as follows: Joint Committee on Taxation, Description of the 

“Katrina Housing Tax Relief Act of 2007” (JCX-12-07), March 19, 2007. 
2

A. Extension and Expansion of Low-Income Housing Credit Rules 

for Buildings in the GO Zones 

Present Law

In general

The low-income housing credit may be claimed over a 10-year period for the cost of 

rental housing occupied by tenants having incomes below specified levels. The amount of the 

credit for any taxable year in the credit period is the applicable percentage of the qualified basis 

of each qualified low-income building. The qualified basis of any qualified low-income building 

for any taxable year equals the applicable fraction of the eligible basis of the building. 

The credit percentage for newly constructed or substantially rehabilitated housing that is 

not Federally subsidized is adjusted monthly by the Internal Revenue Service so that the 10 

annual installments have a present value of 70 percent of the total qualified basis. The credit 

percentage for newly constructed or substantially rehabilitated housing that is Federally 

subsidized and for existing housing that is substantially rehabilitated is calculated to have a 

present value of 30 percent of qualified basis. These are referred to as the 70-percent credit and 

30-percent credit, respectively. 

Credit cap

A low-income housing credit is allowable only if the owner of a qualified building 

receives a housing credit allocation from the State or local housing credit agency. Generally, the 

aggregate credit authority provided annually to each State for calendar year 2006 is $1.90 per 

resident with a minimum annual cap of $2,180,000 for certain small population States. These 

amounts are indexed for inflation. These limits do not apply in the case of projects that also 

receive financing with proceeds of tax-exempt bonds issued subject to the private activity bond 

volume limit. 

Under the Gulf Opportunity Zone Act of 2005, the otherwise applicable housing credit 

ceiling amount is increased for each of the States within the Gulf Opportunity Zone (Alabama, 

Louisiana, and Mississippi). This increase applies to calendar years 2006, 2007, and 2008. The 

additional credit cap for each of the affected States equals $18.00 times the number of such 

State’s residents within the Gulf Opportunity Zone. This amount is not adjusted for inflation. 

For purposes of this additional credit cap amount, the determination of population for any 

calendar year is made on the basis of the most recent census estimate of the resident population 

of the State in the Gulf Opportunity Zone released by the Bureau of the Census before 

August 28, 2005. In addition, under the Gulf Opportunity Zone Act of 2005, the otherwise 

applicable housing credit ceiling amount is increased for Florida and Texas by $3,500,000 per 

State. This increase only applies to calendar year 2006. 

Carryover allocation rule

A low-income housing credit is allowable only if the owner of a qualified building 

receives a housing credit allocation from the State or local housing credit agency. In general, the 

allocation must be made not later than the close of the calendar year in which the building is 
3

placed in service. One exception to this rule is a carryover allocation. In a carryover allocation, 

an allocation may be made to a building that has not yet been placed in service, provided that: (1) 

more than ten percent of the taxpayer's reasonably expected basis in the project (as of the close 

of the second calendar year following the calendar year of the allocation) is incurred as of the 

later of six months after the allocation is made or the end of the calendar year in which the 

allocation is made; and (2) the building is placed in service not later than the close of the second 

calendar year following the calendar year of the allocation. 

Enhanced credit

Generally, buildings located in high cost areas (i.e., qualified census tracts and difficult 

development areas) are eligible for an enhanced credit. Under the enhanced credit, the 70-

percent and 30-percent credit is increased to a 91-percent and 39-percent credit, respectively. 

The mechanism for this increase is an increase from 100 to 130 percent of the otherwise 

applicable eligible basis of a new building or the rehabilitation expenditures of an existing 

building. A further requirement for the enhanced credit is that no more than 20 percent of the 

population of each metropolitan statistical area or nonmetropolitan statistical area may be a 

difficult to develop area. 

Under the Gulf Opportunity Zone Act of 2005, the Gulf Opportunity Zone, the Rita GO 

Zone, and the Wilma GO Zone are treated as high-cost areas for purposes of the low income 

housing credit for property placed-in-service in calendar years 2006, 2007, and 2008. Therefore, 

buildings located in the Gulf Opportunity Zone, the Rita Go Zone, and the Wilma GO Zone are 

eligible for the enhanced credit. Under the enhanced credit, the 70-percent and 30-percent 

credits are increased to 91-percent and 39-percent credits, respectively. The 20-percent of 

population restriction is waived for this purpose. This enhanced credit applies regardless of 

whether the building receives its credit allocation under the otherwise applicable low-income 

housing credit cap or the additional credit cap. The provision to treat the Gulf Opportunity Zone, 

Rita GO Zone and the Wilma GO Zone as a high-cost area is generally effective for calendar 

years beginning after 2005 and before 2009, and buildings placed-in-service during such period 

in the case of projects that also receive financing with the proceeds of tax-exempt bonds subject 

to the private activity bond volume limit which are issued after December 31, 2005. 

Definition of Federally subsidized

In general, any newly constructed or substantially rehabilitated building is treated as 

Federally subsidized for any taxable year if, at any time during such taxable year or prior taxable 

year, there is or was outstanding any obligation the interest of which is exempt under section 

103, or any below market Federal loan, the proceeds of which are or were used (directly or 

indirectly) with respect to such building or the operation thereof. Exceptions are provided from 

this general rule; (1) if the taxpayer elects to reduce eligible basis; and (2) for certain subsidized 

construction financing. For purposes of this rule, a below market Federal loan generally is 

defined as a loan funded in whole or in part with Federal funds if the interest payable on such 

loan is less than the applicable Federal rate in effect under section 1274(d)(1) (as of the date the 

loan was made). A loan is not treated as a below market Federal loan for these purpose, if it is 

below market solely by reason of assistance provided under section 106, 107, or 108 of the 
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Housing and Community Development Act of 1974 as in effect on December 19, 1989 (the date 

of enactment of the Omnibus Budget Reconciliation Act of 1989). 

Description of Proposal

Carryover allocation rule

The provision makes two modifications to the carryover allocation rule for otherwise 

qualifying buildings located in the Gulf Opportunity Zone, the Rita GO Zone and the Wilma GO 

Zone placed in service before January 1, 2011. First, it repeals the requirement that 10 percent of 

the taxpayer's reasonably expected basis in the project (as of the close of the second calendar 

year following the calendar year of the allocation) must be incurred as of the later of six months 

after the allocation is made or the end of the calendar year in which the allocation is made (the 

“10-percent rule”). Second, it repeals the requirement that such building be placed in service not 

later than the close of the second calendar year following the calendar year of the allocation (the 

“second-year placed in service rule”). These changes apply only to allocations made in 2006, 

2007, or 2008. Therefore, an otherwise qualifying building is treated as a qualifying for the 

credit regardless of whether the 10-percent rule or the second-year placed in service rule are 

satisfied if such building: (1) receives an allocation in 2006, 2007, or 2008; and (2) is placed in 

service before January 1, 2011, in one of the GO Zones. 

Enhanced credit

The provision extends the enhanced credit available under the Gulf Zone Opportunity Act 

of 2005 for two additional years (2009 and 2010). This provision to treat the Gulf Opportunity 

Zone, Rita GO Zone and the Wilma GO Zone as a high-cost area is generally effective for 

calendar years beginning after December 31, 2008 and before January 1, 2011, and for buildings 

placed-in-service during such period in the case of projects that also receive financing with the 

proceeds of tax-exempt bonds subject to the private activity bond volume limit which are issued 

during that period. Therefore, otherwise qualifying buildings located in the Gulf Opportunity 

Zone, the Rita GO Zone, and the Wilma GO Zone generally are eligible for the enhanced credit 

if placed in service after 2005 and before 2011. 

Definition of Federally subsidized

The provision modifies the definition of below market Federal loan for otherwise 

qualifying buildings located in the Gulf Opportunity Zone, the Rita GO Zone and the Wilma GO 

Zone that are placed in service during the period beginning on January 1, 2006 and ending on 

December 31, 2010. Under the provision, a loan is not treated as a below market Federal loan 

solely by reason of assistance provided under section 106, 107, or 108 of the Housing and 

Community Development Act of 1974 by reason of: (1) section 122 of that Act; (2) any 

provision of the Department of Defense Appropriations Act, 2006 (Pub. L. No. 109-141); or (3) 

the Emergency Supplemental Appropriations Act for Defense, the Global War on Terror, and 

Hurricane Recovery, 2006 (Pub. L. No. 109-234). Therefore, such assistance will not cause an 

otherwise qualifying building receiving such assistance to be treated as Federally subsidized for 

purposes of the credit. 
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Effective Date

The provisions are effective upon enactment. 
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B. Special Tax-Exempt Bond Financing Rule for Repairs and Reconstructions 

of Residences in the Go Zones 

Present Law

In general

Under present law, gross income does not include interest on State or local bonds. State 

and local bonds are classified generally as either governmental bonds or private activity bonds. 

Governmental bonds are bonds which are primarily used to finance governmental functions or 

which are repaid with governmental funds. Private activity bonds are bonds with respect to 

which the State or local government serves as a conduit providing financing to nongovernmental 

persons (e.g., private businesses or individuals). The exclusion from income for State and local 

bonds does not apply to private activity bonds, unless the bonds are issued for certain permitted 

purposes (“qualified private activity bonds”). The definition of a qualified private activity bond 

includes a qualified mortgage bond. 

Qualified mortgage bonds

Qualified mortgage bonds are tax-exempt bonds issued to make mortgage loans to 

eligible mortgagors for the purchase, improvement, or rehabilitation of owner-occupied 

residences. The Code imposes several limitations on qualified mortgage bonds, including 

income limitations for eligible mortgagors, purchase price limitations on the home financed with 

bond proceeds, and a “first-time homebuyer” requirement. In addition, bond proceeds generally 

only can be used for new mortgages, i.e., proceeds cannot be used to acquire or replace existing 

mortgages. 

Exceptions to the new mortgage requirement are provided for the replacement of 

construction period loans, bridge loans, and other similar temporary initial financing. In 

addition, qualified rehabilitation loans may be used, in part, to replace existing mortgages. A 

qualified rehabilitation loan means certain loans for the rehabilitation of a building if there is a 

period of at least 20 years between the date on which the building was first used (the “20 year 

rule”) and the date on which the physical work on such rehabilitation begins and the existing 

walls and basis requirements are met. The existing walls requirement for a rehabilitated building 

is met if 50 percent or more of the existing external walls are retained in place as external walls, 

75 percent or more of the existing external walls are retained in place as internal or external 

walls, and 75 percent or more of the existing internal structural framework is retained in place. 

The basis requirement is met if expenditures for rehabilitation are 25 percent or more of the 

mortgagor’s adjusted basis in the residence, determined as of the later of the completion of the 

rehabilitation or the date on which the mortgagor acquires the residence. 

Qualified mortgage bonds also may be used to finance qualified home-improvement 

loans. Qualified home-improvement loans are defined as loans to finance alterations, repairs, 

and improvements on an existing residence, but only if such alterations, repairs, and 

improvements substantially protect or improve the basic livability or energy efficiency of the 

property. Qualified home-improvement loans may not exceed $15,000, and may not be used to 

refinance existing mortgages. 
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As with most qualified private activity bonds, issuance of qualified mortgage bonds is 

subject to annual State volume limitations (the “State volume cap”). For calendar year 2007, the 

State volume cap, which is indexed for inflation, equals $85 per resident of the State, or $256.24 

million, if greater. Exceptions from the State volume cap are provided for bonds issued for 

certain governmentally owned facilities (airports, ports, high-speed intercity rail, and solid waste 

disposal) and bonds which are subject to separate local, State, or national volume limits 

(public/private educational facilities, enterprise zone facility bonds, qualified green 

building/sustainable design projects, and qualified highway or surface freight transfer facility 

bonds). 

Gulf Opportunity Zone Bonds

The Gulf Opportunity Zone Act of 2005 (the “Act”) authorizes Alabama, Louisiana, and 

Mississippi (or any political subdivision of those States) to issue qualified private activity bonds 

to finance the construction and rehabilitation of residential and nonresidential property located in 

the Gulf Opportunity Zone (“Gulf Opportunity Zone Bonds”). Gulf Opportunity Zone Bonds are 

not subject to the State volume cap. Rather, the maximum aggregate amount of Gulf 

Opportunity Zone Bonds that may be issued in any eligible State is limited to $2,500 multiplied 

by the population of the respective State within the Gulf Opportunity Zone. 

Gulf Opportunity Zone Bonds issued to finance residences located in the Gulf 

Opportunity Zone are treated as qualified mortgage bonds if the general requirements for such 

bonds are met. The Act also provides special rules for Gulf Opportunity Zone Bonds issued to 

finance residences located in the Gulf Opportunity Zone. For example, the first-time homebuyer 

rule is waived and the income and purchase price rules are relaxed for residences financed in the 

GO Zone, the Rita GO Zone, or the Wilma GO Zone. In addition, the Act increases from 

$15,000 to $150,000 the amount of a qualified home-improvement loan with respect to 

residences located in the specified disaster areas. Gulf Opportunity Zone Bonds must be issued 

before January 1, 2011. 

Description of Proposal

Under the provision, a qualified GO Zone repair or reconstruction loan shall be treated as 

a qualified rehabilitation loan for purposes of the qualified mortgage bond rules. Thus, such 

loans financed with the proceeds of qualified mortgage bonds and Gulf Opportunity Zone Bonds 

may be used to acquire or replace existing mortgages, without regard to the existing walls rule or 

the 20 year rule under present law. The proposal defines a qualified GO Zone repair or 

reconstruction loan as any loan used to repair damage caused by Hurricane Katrina, Hurricane 

Rita, or Hurricane Wilma to a building located in the Gulf Opportunity Zone, the Rita GO Zone, 

or the Wilma GO Zone (or reconstruction of such building in the case of damage constituting 

destruction) if the expenditures for such repair or reconstruction are 25 percent or more of the 

mortgagor’s adjusted basis in the residence. For purposes of the proposal, the mortgagor’s 

adjusted basis shall be determined as of the completion of the repair or reconstruction or, if later, 

the date on which the mortgagor acquires the residence. 
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Effective Date

The provision applies to owner-financing provided after the date of enactment and before 

January 1, 2011.