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USDA Rural Development Northeast Regional Buyers and Sellers Conference. Tim Flaherty, CPA Salmin, Celona, Wehrle & Flaherty, LLP. Marc Fecteau, CPA Fecteau, PLLC. Tax Issues When Buying and Selling . Use of Low Income Housing Tax Credit (LIHC).

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tim flaherty cpa salmin celona wehrle flaherty llp
Tim Flaherty, CPA

Salmin, Celona, Wehrle & Flaherty, LLP

Marc Fecteau, CPA

Fecteau, PLLC

Tax Issues When Buying and Selling

use of low income housing tax credit lihc
Use of Low Income Housing Tax Credit (LIHC)
  • Used for new construction and acquisition & rehabilitations
  • 9% vs. 4% credit
  • Tax-exempt bond financing (TEBs) = automatic allocation of 4% credits (as-of-right credits)
  • Various requirements to meet TEB status
aggregate basis
Aggregate Basis
  • At least 50% of the cost of the project must be financed by tax exempt bond financing
  • Need to be careful w/ use of proceeds
  • Watch for when RD or other debt assumed
  • Need to be careful with timing of this analysis
assuming debt with loan modifications
Assuming Debt with Loan Modifications
  • Original Issue Discount rules could apply
  • RD loan term extensions/re-amortizations/deferrals
  • This would cause a reduction of eligible basis
  • Old & cold concept
  • Treasury is currently relaxed on this issue
708 terminations
708 Terminations
  • IRS rule: a partnership ends when more than 50% of the ownership changes within 12 consecutive months for LLC’s and partnerships.
  • The old entity dies and a new one instantly created for depreciation calculations.
  • Result: depreciation deductions could be lower for the new owners.
754 743 elections
754/743 Elections
  • A method to increase depreciable basis in a “cross purchase” transaction.
  • Can allocate depreciation on a portion of the purchase price to the buyer.
  • Can serve as an added factor in calculating your ROI.
related party rules on acquisition rehabilitation deals
Related Party Rules on Acquisition & Rehabilitation Deals
  • To claim LIHC for acquisition, seller and the buyer cannot be “related”
  • Analysis is aggregate of all owners for both seller and buyer
  • Ownership includes percent of cash flows (both operating and residual), not just percent interest
  • Threshold for pre-HERA 2008 was more than 10%; post- HERA 2008 is now 50%
the negative capital account
The Negative Capital Account
  • A negative capital account balance could cause a capital gain on sale….even is no cash is received.
  • Look at your last k-1 to see if the account has a negative ending balance.
  • Federal and state capital gains tax rates are 15% and 9% respectively.
waterfall issues and special allocations
Waterfall Issues and Special Allocations
  • Seller will want total comprehension of the cash “waterfall” when a project is sold to determine the flow of cash.
  • Watch for special allocations to or from the GP in the selling entity from sales proceeds.
  • Watch your balance sheet for old debts that may need to be cleared before sales proceeds may be distributed.
acquisition entity selection c s ps llc differences
Acquisition Entity Selection: C/S/PS & LLC differences
  • Primary entities used to purchase properties are LLC’s and partnerships; C and S corporations are now rarely used.
  • Huge differences between “pass-through” entities and C & S corporations.
  • Partnerships and LLC’s offer more room to maneuver than corporations.
depreciation recapture
Depreciation Recapture
  • Depreciation in excess of “straight line” can be taxed as ordinary income on the sale of property.
  • 100% of the “excess” depreciation taxed in the year of sale even if you do an installment sale!
  • Properties that use cost segregation are at a higher risk.
cost segregation
Cost Segregation
  • The “segregation” of the shell from selected site assets.
  • Flooring, site improvements, appliances are good examples of items depreciated much faster than the 27.5 years the building will be depreciated over.
  • Can generate recapture if you are not in it for the long run.
deferred development fees
Deferred Development Fees
  • Deferred Fee can be tax credit eligible
  • The deferred fee has to look, smell and feel like a real debt
  • GP/MM guarantees and phantom income
  • Possible “at risk” basis issue
residual analysis
Residual Analysis
  • Bona-fide debt requires a reasonable expectation to be be repaid
  • Prepare residual value analysis using reasonable assumptions
  • If not bona-fide debt, a portion of the loan will be taxable income (deemed grant)
working through rent increases
Working Through Rent Increases
  • In an acquisition/rehabilitation there generally will be some new debt
  • Need to make sure that you can get rent increases to cover the new debt service requirement
  • Agencies may require slower increases for unassisted units
minimum gain
Minimum Gain
  • Limits the losses a partner can claim and transfers those losses to the GP.
  • Can effect the ROI the investor partner is planning for.
  • Can radically effect the GP capital account.
hera 2008
HERA 2008
  • Fixes 9% credit at 9% through PIS 12/31/13
  • Federally sourced, below market rate interest loans no longer taint the credit rate or eligible basis
  • Other favorable “pro-affordable housing” (and related investment) provisions
arra 2009
ARRA 2009
  • LIHC Exchange (NYS opted out)
  • TCAP Funds
  • DOE WAP Funds
  • Energy incentives including “grant-in-lieu”
  • Other favorable “pro-affordable housing” (and related investment) provisions
what s in the hopper for 2010
What’s in the hopper for 2010
  • Still being debated in Congress, therefore no legislation or extensions of certain HERA/ARRA features are law yet
  • Extension of LIHC Exchange is in current proposed legislation
  • Who knows?