A state House committee voted Tuesday to close an affordable housing tax loophole that’s causing major budget problems for urban counties.
Representative Erin Paré, R-Wake, says real-estate investors are abusing a tax exemption designed to help nonprofits build and operate affordable rental housing. It’s costing local governments, particularly in urban counties, millions of dollars in revenue as more companies use the exemption.
"The increase is from for-profit private equity investors initiating the creation of joint ventures with passive non-profits to buy older properties where rents are naturally well below the statutory requirements, to obtain the exemption while increasing rents — in effect, using public funds for private gain," Paré told the House Finance Committee.
Wake County estimates that the "Blue Ridge housing loophole" will reduce county government revenue by $12.3 million in the coming fiscal year — part of the reason county leaders have proposed a 2-cent increase in the property tax rate.
The current law is vague enough to allow for-profit companies to avoid property taxes by giving nonprofits as small a stake as 0.1% ownership of an apartment complex.
Paré's bill would create new definitions for affordable housing and nonprofit ownership to ensure the tax exemption isn’t abused. It would restrict the ability of for-profit real-estate companies to partner with nonprofits to access the tax exemption, and it would set rent limits for properties seeking to qualify as "affordable rental housing."
Rep. Tim Longest, D-Wake, says he supports closing the loophole but wants to make sure the new tax law doesn't harm housing nonprofits like Habitat for Humanity. He said Habitat could be affected by a provision that limits tax exemptions for undeveloped property slated for an affordable housing development in the future.
"There's some concern that it will affect the operations of nonprofits that may have to hold land for a long period of time while it is being prepared for development," Longest said. "We all know that the process of development can take longer than we would like."
The bill now heads to the House Rules Committee, and leaders of both the House and Senate have voiced support for addressing the tax loophole this year.
Constitutional amendment proposal moves forward
The House Finance Committee also voted to put a constitutional amendment on property taxes on the November ballot. The amendment would restrict increases in local property tax rates, but the amendment language doesn't specify how the limitations would work — that would be determined in separate legislation.
Rep. Brian Echevarria, R-Cabarrus and sponsor of the bill, called the move the "next step toward a modern, fairer and more predictable property tax system."
But critics of the restriction say it would limit funding for schools and other services. They blamed the legislature for shifting costs to local governments, which have then raised property tax rates.
"We've continued to create unfunded mandates for our local governments, while at the same time funding education less and less," said Rep. Eric Ager, D-Buncombe. "When you squeeze the balloon up top, that balloon is going to pop out somewhere else, and right now it's popping out in property taxes."
Not all Republicans are sold on a constitutional amendment as a solution to rising property tax bills.
"The real issue here that we're dealing with is what happened to real-estate prices since COVID," said Rep. Stephen Ross, R-Alamance, pointing to recent spikes in property values. "What we're dealing with is something that happened one time, and probably maybe in our lifetime, we won't see again, so I think sometimes we kind of overreact to some things."
