Oklahoma Courts Rule LIHTCs Exempt from Property Tax Valuations

The impact of low-income housing tax credits on the taxable value of real property had been a subject of controversy in Oklahoma for many years before a recent court ruling definitively stated that the credits are to be excluded from calculations of taxable value [Stillwater Housing Assoc. v. Rose, April 2011]. As a result of this decision, there may be lower tax assessments for many low-income housing properties in Oklahoma.

Under Oklahoma law, real property is assessed annually as of Jan. 1 at its fair cash value. That is the estimated price the property would bring in a voluntary sale for the highest and best use for which it is actually used, or classified for use, during the previous calendar year.

Assessors can use the cost, income, or sales-comparison method to estimate fair cash value. However, neither the Oklahoma statutes nor the Oklahoma Tax Commission rules prescribed a methodology for valuing low-income housing tax credit properties.

Background

In 2000, a site owner applied to the Oklahoma Housing Finance Agency (OHFA) for annual tax credits in the amount of $455,235, which were approved. The owner then sold the tax credits to limited partners to generate money to complete construction of the site's housing complex. The tax credits were allocated to the limited partners in 10 annual increments and have flowed through the owner directly to the limited partners.

In 2007, the county assessor valued the property at $6,268,875 for property tax purposes. The owner appealed, asserting the property's value was only $3,975,000, based on the capitalized net operating income of the property. The County's Tax Assessment Board instructed the assessors to capitalize the tax credits as though they were income attributable to the property, which increased the property's valuation to $8,617,200. The Board certified that amount on the tax rolls, and the owner appealed to the district court.

Owner and Assessor's Arguments

The owner argued that the tax credits are exempt from taxation on the value of real estate because they are intangible personal property. Also, the owner argued that, in the alternative, the tax credits are not income, but are a financing mechanism to encourage investment in low-income housing projects.

In contrast, the assessor argued that the tax credits are rights and privileges belonging to the land because they add value to the land and do not exist separately from the land. She contended that including the tax credits in the income stream balanced the value-depressing effect of the rent restrictions on the property, and if the tax credits were not included, then the valuation should be based on market rent rather than restricted rent.

Courts' Reasoning

The trial court ruled that in ordinary usage, the term “credit” includes tax credits, and therefore, tax credits are exempt from taxation on the value of real property under Oklahoma's State Constitution. It also ruled that the legislature has not defined tax credits as a component of real property.

On appeal, the higher court reviewed only questions of law. The appeals court found that the tax credits are subsidies of the investment and not rent subsidies. Congress established the low-income housing tax credit program as part of the Tax Reform Act of 1986 to subsidize the acquisition, rehabilitation, or new construction of rental housing for low-income households. The amount of the tax credit is a percentage of the qualified basis of each qualified low-income building.

Also, the tax credit is sold to investors, usually in a limited partnership, as a means of financing the acquisition, rehabilitation, or construction of the low-income housing, and the investors receive a return of their capital by claiming the tax credit over a 10-year period. Accordingly, the appeals court ruled that the low-income housing tax credit is not income and does not replace income. The low-income housing tax credit is a tax benefit that belongs to the investor rather than a right or privilege belonging to the land. And the court stated that it is a credit against income taxes owed to the federal government.