Overview
The INCREASE Housing Affordability Act addresses the national housing shortage by incentivizing the conversion of underutilized commercial buildings, particularly office spaces, into residential housing units. The legislation creates a dual approach combining tax incentives with technical support infrastructure. By establishing a new federal tax credit for commercial-to-residential conversions and creating an advisory board to assist state and local housing agencies, the bill aims to accelerate the supply of housing units while promoting affordability. The legislation responds to changing commercial real estate dynamics, particularly the increased vacancy rates in office buildings, by repurposing these structures to meet residential housing demand. The bill emphasizes affordable housing creation through enhanced credit rates and incorporates labor standards through prevailing wage requirements.
Core Provisions
The bill amends the Internal Revenue Code of 1986 to establish a commercial-to-residential conversion tax credit under new Section 48F. The base credit equals fifteen percent of qualified conversion expenditures for converting eligible commercial buildings to residential use. Buildings must have been initially placed in service at least fifteen years before conversion and must undergo substantial conversion from office use to residential or residential-retail mixed use. The credit structure includes significant enhancements for projects meeting affordability and labor standards. Projects receive bonus credits of ten, fifteen, or twenty percent when incorporating affordable housing units, with the percentage increase corresponding to the level of affordability provided. All enhanced credits require compliance with prevailing wage requirements for laborers and mechanics employed in the conversion work. The legislation caps credits at two hundred thousand dollars per newly created residential housing unit and ten million dollars per qualified converted building. Section 3 establishes a Commercial to Residential Conversion Advisory Board within one year of enactment, composed of at least twenty members appointed by the Secretary of Housing and Urban Development. The advisory board provides logistical support, technical assistance, best practices guidance, and training to state and local housing agencies to identify and advance conversion opportunities.
Key Points
- Base tax credit of 15% of qualified conversion expenditures for eligible building conversions
- Building eligibility requires initial placement in service at least 15 years prior to conversion
- Bonus credits of 10%, 15%, or 20% available for affordable housing components
- Prevailing wage requirements mandatory for all enhanced credit rates
- Credit caps: $200,000 per residential unit and $10,000,000 per building
- Advisory board establishment required within one year of enactment with minimum 20 members
- Authorization of $5,000,000 annually for fiscal years 2025 through 2029
Legal References
- Internal Revenue Code of 1986, Section 46 (general business credit)
- Internal Revenue Code of 1986, Section 48E (new provision)
- Internal Revenue Code of 1986, Section 48F (commercial-to-residential credit)
- Internal Revenue Code of 1986, Section 50 (basis adjustments)
- Internal Revenue Code of 1986, Section 168 (depreciation)
- Internal Revenue Code of 1986, Section 42 (low-income housing credit)
- Internal Revenue Code of 1986, Section 47 (rehabilitation credit)
- Subchapter IV of chapter 31 of title 40, United States Code (wage rate requirements)
Implementation
The Secretary of Housing and Urban Development bears primary responsibility for establishing and overseeing the advisory board, including appointing its members and ensuring it fulfills its mandate to support state and local housing agencies. The Secretary of Labor plays a role in enforcing prevailing wage requirements through existing wage determination processes under title 40 of the United States Code. The Internal Revenue Service administers the tax credit program, determining eligibility for the base credit and enhanced rates, verifying compliance with affordability and prevailing wage requirements, and enforcing the per-unit and per-building credit limitations. State and local housing agencies serve as intermediaries, receiving technical assistance from the advisory board and working with developers to identify suitable conversion opportunities. Funding mechanisms include the tax expenditure from credits claimed against federal income tax liability and direct appropriations of five million dollars annually from fiscal years 2025 through 2029 to support advisory board operations. Compliance measures require taxpayers to demonstrate that buildings meet the fifteen-year age requirement, that conversions qualify as substantial conversions from office to residential use, that expenditures are properly chargeable to capital accounts, and that prevailing wages are paid when claiming enhanced credits. The bill incorporates existing enforcement mechanisms from the low-income housing credit program and rehabilitation credit program by reference.
Legal References
- Subchapter IV of chapter 31 of title 40, United States Code (prevailing wage determinations)
Impact
Direct beneficiaries include property owners and developers undertaking commercial-to-residential conversions, who receive substantial tax credits reducing conversion costs and improving project feasibility. Renters and homebuyers benefit from increased housing supply and specifically from affordable housing units created through the enhanced credit structure. State and local housing agencies gain access to federal technical assistance and best practices for advancing conversion projects. Communities with high office vacancy rates benefit from repurposing underutilized commercial space into productive residential use, potentially revitalizing downtown areas and commercial districts. The bill does not include specific cost estimates, but the tax credit represents a significant federal expenditure through reduced tax revenue. The two hundred thousand dollar per-unit cap and ten million dollar per-building cap provide some fiscal constraint, though total costs depend on uptake rates and the number of qualifying projects. Administrative burden falls on the IRS for credit administration and verification, HUD for advisory board operations, and the Department of Labor for wage determination enforcement. State and local housing agencies face increased workload in identifying opportunities and coordinating with developers, though the advisory board mitigates this through technical assistance. Expected outcomes include increased conversion of obsolete office buildings to residential use, expansion of housing supply in markets with commercial vacancies, creation of affordable housing units through the enhanced credit incentive, and improved coordination between federal agencies and local housing authorities. The authorization of appropriations extends through fiscal year 2029, creating a five-year window for the advisory board, though the tax credit provisions contain no explicit sunset date.
Key Points
- Property owners and developers receive tax credits reducing conversion costs
- Renters and homebuyers benefit from increased housing supply and affordable units
- State and local housing agencies receive federal technical assistance
- Communities with office vacancies gain residential revitalization opportunities
- No explicit sunset for tax credit; advisory board funded through FY2029
Legal Framework
The constitutional basis for this legislation rests on Congress's taxing and spending powers under Article I, Section 8 of the Constitution, which authorize the creation of tax credits and appropriations for general welfare purposes including housing. The bill operates within the established framework of the Internal Revenue Code, adding new sections that parallel existing housing and rehabilitation credit structures. By referencing and incorporating compliance mechanisms from Section 42 (low-income housing credit) and Section 47 (rehabilitation credit), the legislation builds on decades of administrative precedent and regulatory guidance. The prevailing wage requirements invoke existing statutory authority under title 40 of the United States Code, applying well-established wage determination processes to conversion projects. The bill does not explicitly preempt state or local law, instead working cooperatively with state and local housing agencies to advance conversions within existing local zoning and land use frameworks. The advisory board's role in providing technical assistance suggests a collaborative federalism approach rather than federal mandates. The legislation does not contain specific judicial review provisions, meaning challenges to credit determinations would proceed under general Administrative Procedure Act standards and tax court jurisdiction for tax matters. Regulatory implications are substantial, as the Treasury Department must issue regulations defining key terms including "substantially converted," "qualified conversion expenditures," and the mechanics of the affordable housing enhancement. HUD must develop operational procedures for the advisory board and establish criteria for technical assistance provision.
Legal References
- U.S. Constitution, Article I, Section 8 (taxing and spending powers)
- Internal Revenue Code of 1986, Section 42 (low-income housing credit)
- Internal Revenue Code of 1986, Section 47 (rehabilitation credit)
- Title 40, United States Code, Subchapter IV of chapter 31 (prevailing wage requirements)
- Administrative Procedure Act (judicial review standards)
Critical Issues
Implementation challenges center on defining "substantially converted" with sufficient precision to prevent abuse while maintaining flexibility for diverse building types and market conditions. The fifteen-year age requirement may exclude some buildings that are functionally obsolete but do not meet the temporal threshold, potentially limiting the program's effectiveness in rapidly changing markets. Prevailing wage requirements, while protecting labor standards, increase conversion costs and may reduce project feasibility in markets with tight margins, potentially undermining the affordability goals. The interaction between the per-unit cap of two hundred thousand dollars and the per-building cap of ten million dollars creates complexity, particularly for large-scale conversions that might otherwise be most efficient. The bill does not address zoning and land use barriers that often prevent commercial-to-residential conversions, meaning projects may qualify for tax credits but remain infeasible due to local regulatory constraints. Cost implications are uncertain because the bill contains no aggregate cap on total credits available, creating potential for significant and unpredictable federal revenue loss if conversion activity exceeds projections. The advisory board's effectiveness depends on adequate staffing and expertise, but the five million dollar annual appropriation may prove insufficient for meaningful technical assistance across all states and localities. Unintended consequences could include incentivizing conversions in markets where office space remains viable, potentially exacerbating commercial real estate challenges, or creating windfalls for projects that would have proceeded without the credit. The affordable housing enhancement structure may prove too complex for smaller developers to navigate, potentially concentrating benefits among sophisticated taxpayers. Opposition arguments likely focus on the revenue cost of the tax credit, the appropriateness of federal intervention in local real estate markets, the effectiveness of supply-side housing policies versus demand-side assistance, and concerns that conversions may not produce housing affordable to lowest-income households despite the enhanced credits.
Key Points
- Definition of "substantially converted" requires regulatory precision to prevent abuse
- 15-year age requirement may exclude functionally obsolete but newer buildings
- Prevailing wage requirements increase costs and may reduce project feasibility
- No aggregate credit cap creates uncertain and potentially large federal revenue loss
- Bill does not address local zoning barriers that may prevent conversions
- Advisory board funding may be insufficient for comprehensive technical assistance
- Risk of incentivizing conversions in markets where office space remains viable
- Complex enhancement structure may favor sophisticated developers over smaller operators