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, 1r iM ACTION NEEDED ON REHABILITATION INVESTMENT TAX CREDITS • Our continuing battle to save the rehabilitation investment tax credits has recently suffered a setback with the Tax Reform Proposal reported out of the Senate Finance Committee. Though the two-tiered 20% and 10% credits are preserved from the House -passed version, the new provision subjecting the credits to passive loss limitations would render them virtually useless. Gen- erally, under this provision, an individual's losses or credits from businesses in which the taxpayer does not materially participate, (i.e. limited partnerships) and from all rental activities, could only be used to offset income from such activities. This would substantially reduce the field of investors, and those investors who could use the tax credits would only do so with difficulty. Generally, estimates are that most of the rehab ITC activity will cease. Preservation Action and the Committee for Future Investment in America's Past (CFIAP) have been closely following the Senate activity and preparing remedial measures. There are presently three potential avenues for an amendment to exempt the rehab ITC from the passive loss rule. The first would be a Finance Committee sponsored amendment which would be brought up at the beginning of Senate considerations; the second would be a floor amendment presented during consideration by one of several possible senators; and third would be resolution during House -Senate Conference Committee. The three measures will be attempted in the order mentioned above. Since any amendments presented must be revenue neutral, CFIAP is now attempting to reconcile that issue. They have contracted with an outside revenue estimator to more closely determine the revenue loss that would result. In addition, a source of non -controversial revenue to compensate the loss must be found, which will probably be something like a tax compliance issue. • Urgent lobbying of our Senators is needed NOW. On June 2 the Senate began consideration of the proposal, and as we have learned From past experience, they may move quickly. lease call and write our Senators immediately and urge their support of any proposed amendment that will preserve the incentives. I am attaching a sample letter which you can easily tailor to your specific situation and send on as soon as possible. While the passive loss limitation is considered to be the most pressing issue with regard to the ITC, our lobbying group will also continue to work on more advantageous transition rules. Following is a brief summary of the provisions: Senate `Finance Committee Tax Reform Bill Changes for Property Placed In Service After 1/1/87: Two-tiered credit - 20% for certified historic rehab. 10% for non -historic buildings built prior to 1936. Full adjustment to basis for all historic rehab. Depreciation set at 31.5 years for commercial buildings; 27.5 for residential. 75% wall test eliminated for certified historic rehab; alternative test for non -historic rehab: Transition Rule: Property Qualifies for Transition Relief If: Placed in service before 1/1/94 and Rehabbed pursuant to binding contract on 3/1/86 or; Purchased or under binding contract to purchase by 3/1/86, and Rehabbed pursuant to written contract binding on 3/1/86 or, Parts 1 and 2 filed before 3/1/86 or, Lesser of $1 million or 5% of rehab costs incurred before 3/1/86 (or required to be incurred pursuant to written contract binding on • 3/1/86). Upon qualification for Transition, the following apply: Reduced credit:5 to 0%; 20% to 13%; 15% to 10% Full adjustment to basis "Implied" 19 -year depreciation. Passive Loss Rule: Generally rehab ITCs cannot be used to offset income from salary, portfolio or other businesses.