PHADA s 2009 Commissioners Conference. San Diego, CA Monday, January 26, 2009

Transcription

1 PHADA s 2009 Commissioners Conference San Diego, CA Monday, January 26, 2009 Low-Income Housing Tax Credit Advanced Issues George F. Littlejohn, CPA [email protected] Robert S. Thesman, CPA [email protected]

2 Outline LIHTC updates per H.R Property compliance Interest capitalization issues LIHTC with Historic Rehabilitation Credits Other

3 LIHTC Updates Per H.R. 3221

4 Investor Incentives Low Income Housing Credits Offset Alternative Minimum Tax (AMT) Effective : Buildings placed in service after December 31, 2007 Tax-Exempt Housing Bond interest not subject to AMT Effective: Bonds issued after July 30, 2008

5 Financial Feasibility $0.20 increase in credit allocation for 2008 and 2009 Small State Minimum increased by 10%

6 Temporary increase of LIHTC pool 2008 Population 36.5 mil $2.00 Multiplied by $2.20 Credit pool $73.1 mil $80.4 mil 2008 Credit pool $2,325,000 Under new law $2,550,000 Additional credits $230,000

7 Financial Feasibility Additional 30% basis boost State housing credit agency designation Project-based Financial feasibility Effective: Buildings placed in service after July 30, g p y, 2008

8 H.R State Housing Agency 130% (Buildings PIS after 7/30/08) HUD DDA or QCT = 130% (does not apply to tax-exempt bond financed projects)

9 Financial Feasibility Temporary 9 percent minimum credit rate New construction and substantial rehabilitation Does not apply to acquisition or projects financed by taxtbonds exempt Effective: Buildings placed in service after July 30, 2008 and before December 31, 2013

10 9% Tax Credit 9.5% 9.0% 8.5% 8.0% 7.5% Jan 88 Jul 08 12/31/2013

11 Financial Feasibility Example: Adjusted Eligible Basis 10,000,000 10,000,000 X Applicable Percentage 7.94% 9.00% = Total Annual Credits 794, , X 10 Years (Total Credits) 7,940,000 9,000,000 X Syndication Factor 92.00% 80.00% 00% = Total Equity 7,304,800 7,200,000

12 Financial Feasibility Federal Subsidy taint limited to tax-exempt bond financing 3.40% to 9.00% Effective : Buildings placed in service after July 30, 2008

13 Tax-exempt bonds Below market federal loans

14 Financial Feasibility Allowable basis for Community Service Facilities is increased 25% of first $15 million 10% thereafter Effective: Buildings placed in service after July 30, 2008

15 Financial Feasibility H.R $3,750, ,000 $4,250,000 Community Service Facility 25% of first $15 million eligible basis 10% of remaining eligible basis $20 million > $2 mil Community Service Facility

16 Rural AMI Limits Project can base income and rent limits on the greater of Very Low Income (VLI) for local area 50% of National Non-Metro AMI IRC Section 42(i)(8)

17 State Non-Metro AMI lower than Federal Non-Metro AMI (Will contain individual areas with income levels lower than federal non-metro income levels)

18 Hold Harmless HUD Hold Harmless Impacted Project: Any project whose AMGI in 2007 or 2008 would have been less but for the HUD hold harmless policy

19 Let s talk about Interest Capitalization

20 Topics to cover on interest: Sources to find guidance 263A & related regulations Differences between new construction and acq/rehab projects Methods of calculating Avoided Cost Method interest to be capitalized Myths about 266

21 Ready? Did you have plenty of coffee this morning?

22 TAX Source IRC 263A Reg 1.263A-12 Reg 1.263A-10 Reg 1.263A-9 IRS Notice Question addressed What interest is capitalized? When do you start? When do you stop? How is real property defined? Avoided cost method Special rules on the avoided cost method

23 IRC 263A Interest is capitalizable

24 IRC 263A What to capitalize?

25 When to capitalize? Reg 1.263A-12 Production period

26 Reg 1.263A When do we start? (e) Physical production activities (2) Illustrations. The following is a partial list of activities any one of which constitutes a physical production activity with respect to the production of real property: (i) Clearing, grading, or excavating of raw land; (ii) Demolishing a building or gutting a standing building; (iii) Engaging in the construction of infrastructure, such as roads, sewers, sidewalks, cables, and wiring; (iv) Undertaking structural, mechanical, or electrical activities with respect to a building or other structure; or (v) Engaging in landscaping activities.

27 What s not a production activity? it Reg 1.263A-12 (f) Activities not considered physical production. The activities described in paragraphs (f)(1) and (f)(2) of this section are not considered physical production activities: (1) Planning and design. Soil testing, preparing architectural blueprints or models, or obtaining building permits. (2) Incidental repairs. Physical activities of an incidental nature that may be treated as repairs under

28 When to capitalize? (cont.) Reg 1.263A-12 Production period

29 How is real property defined? d? Reg 1.263A-10 Unit of property (b) Units of real property. (1) In general. A unit of real property includes any components of real property owned by the taxpayer or a related person that are functionally interdependent and an allocable share of any common feature owned by the taxpayer or a related person that is real property even though the common feature does not meet the functional interdependence test. When the production period begins with respect to any functionally interdependent component or any common feature of the unit of real property, the production period has begun for the entire unit of real property.

30 TAX: AVOIDED COST METHOD

31 TAX: Related party avoided cost rules Source Method Reg 1.263A-9 General avoided cost rules IRS Notice IX (A)(1) Deferred asset method IRS Notice IX (B)(1) Substituted cost method

32 Deferred asset method IRS Notice IX (A)(1) 1 of 3 IX. Methods of Capitalization and Recovery. In the case of related parties to which the avoided cost rules apply (as described in section VIII (A) or (B) of this notice), the deferred asset method shall be used to comply with the interest capitalization ti requirements of section 263A(f) unless the substitute t cost method is elected. (A) Deferred Asset Method. (1) In General. Under the deferred asset method, the related party is required to capitalize interest equal to an amount that the producing taxpayer would have capitalized under section 263A or 460, using the avoided cost principles, had the producing taxpayer itself incurred the interest on the eligible debt of the related party ( related party avoided cost debt ). The requirements of the preceding sentence apply only to interest that is incurred (as modified by section V of this notice) by the related party during the production period of the qualified property by the producing taxpayer. Moreover, such requirements only apply to interest that is incurred by the related party during the period of time that such person and the taxpayer are related.

33 Deferred asset method IRS Notice IX (A)(1) IX. Methods of Capitalization and Recovery. In the case of related parties to which the avoided cost rules apply (as described in section VIII (A) or (B) of this notice), the deferred asset method shall be used to comply with the interest capitalization requirements of section 263A(f) unless the substitute cost method is elected. (A) Deferred Asset Method. (1) In General (continued) 2 of 3 In applying the deferred asset method to interest incurred by related parties, the taxpayer producing the qualified property first must allocate the taxpayer's traced and avoided cost debt to the taxpayer's accumulated production expenditures. The interest incurred by related parties is subject to these rules only if the taxpayer's accumulated production expenditures exceed the total amount of its traced and avoided cost debt (such excess amount shall be referred to as remaining production expenditures ). Similarly, interest on the eligible debt of related parties that is capitalized with respect to the taxpayer's remaining production expenditures shall only include interest on eligible debt that has not been allocated by the related party with respect to its own production expenditures of qualified property for the taxable year. Moreover, for purposes of this rule, the related party shall apply the interest capitalization rules to its own production expenditures first in time, before determining the amount of its related party avoided cost debt.

34 Deferred asset method IRS Notice IX (A)(1) IX. Methods of Capitalization and Recovery. In the case of related parties to which the avoided cost rules apply (as described in section VIII (A) or (B) of this notice), the deferred asset method shall be used to comply with the interest capitalization requirements of section 263A(f) unless the substitute cost method is elected. (A) Deferred Asset Method. (1) In General. (continued) 3 of 3 Generally, a related party shall capitalize interest incurred during the related party's taxable year only with respect to qualified property held by the producing taxpayer as of the end of the related party's taxable year in issue. However, interest incurred by the related party shall be capitalized with respect to the qualified property produced by the taxpayer during the related party's taxable year, even though the producing taxpayer has sold or transferred the property before the end of the related party's taxable year if, after such sale or transfer, a person related to the related party still holds the property as of the end of the related party's taxable year. (For purposes of the preceding sentence, two persons shall be related if their relationship is described in section 267(b) or 707(b) of the Code.) In such a situation, the related party shall capitalize interest with respect to the qualified property as if the property were still held by the producing taxpayer. (For examples illustrating the principles of this paragraph, see section XII(B)(1) of this notice, concerning the deferred asset method and flow-through entities.)

35 Substituted cost method IRS Notice IX (B)(1) 1 of 2 IX. Methods of Capitalization and Recovery. In the case of related parties to which the avoided cost rules apply (as described in section VIII (A) or (B) of this notice), the deferred asset method shall be used to comply with the interest capitalization requirements of section 263A(f) unless the substitute cost method is elected. (B) Substitute Cost Method. (1) In General. As provided in this section (IX)(B)(1), taxpayers may elect to use the substitute cost method. Under the substitute cost method, the producing taxpayer shall capitalize, during each year of the production period, certain substitute costs in lieu of the taxpayer's related parties being required to capitalize interest on their related party avoided cost debt. Taxpayers using the substitute cost method may avoid some of the administrative complexities involved in determining related party avoided cost debt under the deferred asset method.

36 Substituted cost method IRS Notice IX (B)(1) 2 of 2 IX. Methods of Capitalization and Recovery. In the case of related parties to which the avoided cost rules apply (as described in section VIII (A) or (B) of this notice), the deferred asset method shall be used to comply with the interest capitalization requirements of section 263A(f) unless the substitute cost method is elected. (B) Substitute Cost Method. (1) In General. (continued) Substitute costs consist of a pro-rata amount of all the taxpayer's costs that would be otherwise deductible by the taxpayer for the current taxable year, after application of all provisions of the Code. Thus, for example, substitute costs would typically include marketing and advertising expenses, as well as certain types of general and administrative expenses not otherwise subject to capitalization under the Code. In contrast, substitute costs do not include permanently nondeductible costs, costs which may be deductible in a future taxable year but are not deductible currently (see, e.g., sections 461(h) and 469 of the Code), or costs that are required to be capitalized (without regard to this section IX(B)), under any section of the Code (e.g., sections 263A and 460). Moreover, substitute costs include any interest expense incurred by the taxpayer during the taxable year on eligible debt that would not otherwise be subject to capitalization. For example, assume that the taxpayer incurred interest on eligible debt outside the production period of qualified property produced by the taxpayer. Such interest expense would be a substitute cost because such interest would not otherwise be subject to capitalization under section 263A(f).

37 Had enough?

38 LET S SEE SOME EXAMPLES!

39 Loan Bal. x Int Rate Total Interest Incurred during period Loan Closing PIS Date

40 Loan Bal. x Int Rate Total Interest Incurred during period Loan Closing PIS Date

41 New Construction Non-federally Subsidized New Const Acq/ Rehab Fed Sub d 4% 4% Non-fed Sub d 9% A 4% R 9% GAAP TAX Lo oan Balance Capitalized Lo oan Balance Capitalized Loan Closing PIS Date Loan Closing PIS Date All interest incurred is capitalized since it all goes toward the construction of the project (i.e. no interest expense during the construction period)

42 New Construction Federally Subsidized New Const Acq/ Rehab Fed Sub d 4% 4% Non-fed Sub d 9% A 4% R 9% GAAP TAX GIC Balance Bon d Balance Amount of interest incurred cancelled out by interest earned on GIC Remaining Capitalized Bon nd Balance Expensed Capitalized Bond Issue PIS Date Bond Issue PIS Date FAS 62 applies; the net of interest incurred and interest earned on proceeds placed in GIC will be capitalized Only interest on bond proceeds actually used in construction will be capitalized; remaining interest is expensed No interest expense during construction period

43 Acq/Rehab Federally Subsidized HEAVY Acq/Rehab New Const Acq/ Rehab Fed Sub d 4% 4% Non-fed Sub d 9% A 4% R 9% GAAP TAX Amount of interest incurred cancelled out by interest earned on GIC Expensed Capitalized Bond Issue PIS Date Bond Issue PIS Date FAS 62 applies; the net of interest incurred and interest earned on proceeds placed in GIC will be capitalized Heavy acq/rehab indicates all units are vacated during rehab No interest expense during rehab period Only interest on bond proceeds actually used in rehab will be capitalized; remaining interest is expensed

44 Outline LIHTC updates per H.R Property compliance Interest capitalization issues LIHTC with Historic Rehabilitation Credits Other

45 LIHTC and Historic i Rehabilitation ti Credits

46 Issues to watch for Differences between LIHTC and HTC 1 Time versus 10 year credit 5 year versus 15 year recapture period Potential basis reduction for LIHTC purposes Lease pass through or Sandwich Lease Lease pass through or Sandwich Lease structure

47 Other Issues

48 Tax-exempt depreciation rules Overview of tax-exempt use rules Solutions: Nonprofit has same interest over entire life Taxable subsidiary Tax issues related to taxable subsidiaries

49 Let s Wrap It Up.

50 Final discussion: more questions and answers

51 For Further Information on LIHTC Housing Find FREE tax credit resources at: Send Queries & Comments to: (512) Austin, TX (415) San Francisco, CA