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HUD Archives: News Releases

HUD No. 98-305
Further Information:For Release
In the Washington, DC area: 202/708-0685Tuesday
Or contact your local HUD officeJuly 21, 1998


WASHINGTON - Housing and Urban Development Secretary Andrew Cuomo said a new ruling announced today by the Internal Revenue Service will greatly assist HUD's efforts to preserve affordable housing and lower excessive rental subsidies paid to property owners participating in the Section 8 rental assistance program.

Under the rule, owners of HUD-subsidized housing developments will not have to pay taxes on the difference between market-rate loans and the below-market rate HUD second mortgage loans that enable owners' current mortgages to be written down. Normally, the IRS would consider the difference between the market interest rate and the below-market interest rate to be taxable income.

The ruling enables HUD to more smoothly implement the Multifamily Assisted Housing Reform and Affordability Act, also known as Mark-to-Market legislation, which President Clinton signed into law last October. Through Mark-to-Market, mortgages on HUD-insured multifamily projects will be restructured and reduced to levels that reflect comparable market rents.

The Mark-to-Market law ends excessive rental subsidies to private landlords under the project-based Section 8 program by cutting subsidies so that landlords receive rents from HUD at market rates. It is expected to save taxpayers nearly $1.6 billion over five years and billions of dollars more in the years ahead -- while preserving affordable housing for 850,000 people.

"Today's IRS ruling is good news for taxpayers," Cuomo said. "It will save taxpayers money by ending excessive rental subsidies, but still allow landlords to make a fair profit."

Despite cuts in subsidies to landlords, the new law allows landlords to continue earning a profit by restructuring about $12.5 billion of their debt. As part of restructuring, landlords refinance part of their mortgage balance at lower interest rates and with deferred payments. This will enable landlords to continue providing affordable housing even after HUD's Section 8 subsidies are cut.

In return for reducing an owner's first mortgage, HUD will make a second mortgage loan with a below-market interest rate in an amount that can reasonably be expected to be repaid.

For years property owners have been concerned that debt restructuring would be treated for tax purposes as a forgiveness or cancellation of debt and immediately taxed as ordinary income, even if there was a second mortgage for the amount of the written-down debt.

Generally, Section 7872 of the Internal Revenue Code requires taxpayers to recognize as imputed income any below-market rate loans that they receive. These rules prevent parties from transferring income without properly recognizing it. Today's IRS ruling indicates that second mortgage loans issued under the Mark-to-Market program and described in the ruling will qualify for special exemptions from Section 7872.

High rental subsidies were originally created to encourage construction of affordable housing during the 1970s. Over the past 20 years, the subsidies escalated with inflation and in many cases now far exceed rents for comparable apartments on the private market.

Additional information or technical details about the new IRS rule can be obtained by logging on to the IRS Web site: http://www.irs.ustreas.gov.

Content Archived: January 20, 2009

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