Pass-through limitation tax credit; report, penalty.

A BILL to amend the Code of Virginia by adding in Article 3 of Chapter 3 of Title 58.1 a section numbered
58.1-339.15
, relating to pass-through limitation tax credit; report; penalty.

Be it enacted by the General Assembly of Virginia:

1. That the Code of Virginia is amended by adding in Article 3 of Chapter 3 of Title 58.1 a section numbered
58.1-339.15
as follows:

§
58.1-339.15
. Pass-through limitation tax credit.

A. As used in this section:

"Consumer Price Index" means the Consumer Price Index for All Urban Consumers (CPI-U) for the South, as published by the Bureau of Labor Statistics
of the
U
.
S
.
Department of Labor, or its successor index.

"Qualified rental property" means real property
that
has
been rented solely for residential purposes
for at least 24 consecutive months
and has no outstanding notices of violation of the Uniform Statewide Building Code
(§
36-97
et seq.)
or local property maintenance codes that have remained uncorrected for more than
90
days. "Qualified rental property" does not
include
(i) owner-occupied properties with fewer than four rental units, (ii) properties receiving tax benefits under §
58.1-3295
for affordable
rental
housing, and (iii) properties receiving federal Low-Income Housing Tax Credits or similar federal or state affordable housing subsidies.

"Qualifying tax increase" means any increase in real property tax on a qualified rental property that exceeds the limitation set forth in subsection A of §
58.1-3321
, whether resulting from general reassessment, biennial assessment, annual assessment, or an increase in the tax rate pursuant to subsection B of §
58.1-3321
.

"Renewal lease" means a
rental
lease agreement for a dwelling unit with a tenant who has continuously occupied such unit for at least
12
months immediately preceding the commencement of the new lease term.

"Weighted average rent increase" means the average percentage increase in rent across all dwelling units in a qualified rental property, weighted by the number of units at each rent level.

B.
For taxable years beginning on and after January 1, 2026, but before January 1, 2031,
a taxpayer
that
owns a qualified rental property
that limits rent increases as described in subsection
C

shall be allowed a nonrefundable credit against the tax levied pursuant to §
58.1-320
.
Such credit shall be equal to:

1. In the first tax year following the qualifying tax increase
, 50
percent of the qualifying tax increase;

2. In the second tax year following the qualifying tax increase
, 30
percent of the original qualifying tax increase; and

3. In the third tax year following the qualifying tax increase
, 10
percent of the original qualifying tax increase.

C
. A taxpayer

that
owns qualified rental property shall be eligible for a credit pursuant to this section
,
provided that he certifies
that (i) for all renewal leases executed during the applicable tax year, the weighted average rent increase for occupied units does not exceed the annual percentage increase in the Consumer Price Index for the
12
-month period ending on December 31 of the preceding calendar year
and
(ii)
a
ll real property taxes, business licenses, and other local taxes and fees related to the property are current and have been paid in full for the preceding two years.

D. The Department shall develop
guidelines for the administration of th
e
credit, including an application process that requires a
taxpayer

that
owns qualified re
ntal
property
to
apply to the Department
for each taxable year in which the credit is claimed. Such application shall inc
lude (i)
a notarized certification that the rent increase limitations described in subsection C have been met
, (ii) documentation of
the difference in rent paid for
the current and preceding lease terms of
each dwelling unit located in the qualifi
ed
rental property
, (iii) copies of all renewal leases executed
for dwelling units located on the property
during the applicable period or a summary thereof
,

and
(iv)
a c
alculation of the weighted average rent increase for
such
property.

E.
The Department shall conduct an audit of no less than five percent of the qualif
ied
rental properties
for which a credit is claimed in a taxable year. If the Department determines that an owner of qualif
ied
re
ntal
property
that
claimed a credit pursuant to this section
falsely certified compliance
with any of the requirements
of
this section, the owner
(i)
shall
be required to recapture the full amount of credit received
,
and (ii) shall be prohibited from qualifying for a subsequent c
redit pursuant to this section for five years following the discovery of such false certification.
Any tax credits recaptured shall increase the income tax liability of the taxpayer who claimed the credit in a like amount and shall be included on the tax return of the eligible taxpayer submitted for the taxable year in which the recapture is identified
.
Any owner
t
h
at
knowingly makes a false statement in an application for a tax credit pursuant to this section
is
guilty of a Class 3 misdemeanor
.

F. For qualifying tax increases occurring
on and after
January 1, 2026
,

but before
Janu
ary 1, 2027, the credit shall be available only for qualified rental propert
ie
s containing
10
or more dwelling units. For qualifying tax increases occurring
on and after
January 1, 2027
,

but before
January 1, 2028, the credit shall be available only
for
qualified rental propert
ie
s containing
three
or more dwelling units
. For qualifying tax increases occurring on and after January 1, 2028, the credit shall be available
for
all qualified rental properties.

G. By November 1 of each year, the Department shall report to the
Chairs of the
House
Committee on
Appropriations, House Committee
on Finance
, and Senate Committee on Finance and Appropriations on the
utilization

of the credit. Such report shall include (i) the number of taxpayers receiving a credit pursuant to this section, (ii) the total amount of credits granted, (iii) the average weighted rent increase of properties for which taxpayers are receiving cred
its, (iv) the number of dwelling units in properties for which taxpayers are receiving credits, and (v) the number of applications for the credit denied and the reasons for denial.

H.
The aggregate amount of credits allowable under this section shall not exceed $5 million per taxable year. Credits shall be allocated by the Department on a first-come, first-served basis.

I.
The amount of the credit that may be claimed in any single taxable year shall not exceed the individual's liability for taxes imposed by this chapter for that taxable year. If the amount of the credit allowed under this section exceeds the individual's tax liability for the taxable year in which the eligible transaction occurred, the amount that exceeds the tax liability may be carried over for credit against the income taxes of the individual in the next five taxable years or until the total amount of the tax credit has been taken, whichever is sooner.

J
. The Tax Commissioner shall develop guidelines for claiming the credit provided by this section. Such guidelines shall be exempt from the provisions of the Administrative Process Act (§
2.2-4000
et seq.).