Boston Business Journal
CLOSEST THING TO HEAVEN
Code creates shelter for small investor
Most of us would dismiss as absurd the thought that tax-shelter opportunities in the Internal Revenue Code are designed for the middle, small or even tiny level investor ... but the code, in an unusually direct fashion, has created a tax shelter that is suitable for investors regardless of their income. The only qualification is that they are taxpayers and want to put their tax dollars to work for them rather than writing a check to the government.
The shelter arises out of the Low Income Housing Tax Credit program. And so far as anyone has been able to ascertain, it is the closest an investor will ever get to heaven, at least in this lifetime. It is difficult to overemphasize the importance of tax credits. A dollar of tax credit reduces your tax liability by $1 and is, therefore, worth $1 of real cash. The only cloud in this sky of pure blue is the difficulty at times of getting sufficient rents from low-income tenants to cover the current costs of operations, including debt service. Projects with substantial number of Section 8 tenants have the best of both worlds. Not only do they receive a substantial part of their rents directly from the government on a regular basis, but also they are able to collect any back rents from the government as well. ... assuming an economically viable project fully rented to low-income families, the investors could be receiving a 22.5 percent annual after-tax return for 10 years... This is nothing short of staggering, particularly in view of the fact that this return assumes neither cash flow to the investors nor capital appreciation. Obviously, the return would grow to the extent of any economic benefits. Even without these benefits, the federal government is effectively guaranteeing, in this example, a return in excess of 20 percent after-tax. And, as they say, if a 20 percent plus guaranteed return on an investment isn't heaven, it sure ain't hell.
Ernst and Young
Financial Planning Reporter
LOW-INCOME HOUSING:
GET YOUR FREE REAL ESTATE HERE!
Low-income housing, with ownership held through a limited partnership, may be the only true tax-sheltered investment to have survived the 1986 tax reform. Low income housing may just be the only tax-sheltered investment in which tax savings alone can be sufficient to support an investment decision, with economics taking a back seat.
In addition, you can earn a return on your investment that will allow you to acquire the real estate virtually free, entirely from tax savings. The typical low-income housing venture projects cumulative tax savings over the first 10 or 11 years of about 140%-150% of the cash invested. Best of all, there is no later recapture of the tax savings.
THE NEW YORK TIMES
TAX CREDITS FOR CORPORATIONS
The roster of American corporations that invest in low-income rental housing is expanding as a result of tax legislation that let them do well by doing good. In return providing equity financing to Nonprofit developers, the corporations receive Federal tax credits at a discount. Such corporate investment is increasing and has become crucial to Nonprofit development organizations, which have emerged as important producers of low-income housing. In California, Illinois, Rhode Island and Vermont, more than 40 percent of credits issued went to Nonprofit projects. In the wake of the law, several corporations have invested at least $2 million each in Tax Credits Equity Funds for Nonprofit developers.
In addition, the Federal National Mortgage Association-Fannie Mae-which buys mortgages from primary lenders, has committed to invest about $100 million in low-income housing tax credits. About 55 percent of the money will be directed to Nonprofit projects. The Credits are distributed on the basis of population to the states, which then allocate them. Neighborhood-based Nonprofits don't see themselves just as housing producers. Their mission is to keep neighborhoods good places to live. The Nonprofits' output has become particularly significant given the sharp drop in direct Federal subsidies for low-income housing and the exodus of many tax-motivated for-profit developers from the field.
BARRON'S
The Ground Floor
THE ALLURE OF LOW-INCOME HOUSING CREDITS....A VERY HOT COMMODITY
The Low Income Housing Credit, one of the few major tax shelters left after the Tax Reform Act of 1986, is being extended one year. And the race is on to see who will reap its tax benefits. There will be only an estimated $210 million in tax credits available in 1990. Dividing the total by $7,000 produces 30,000, the number of investors who theoretically would be able to take advantage of the governmental gift. However, a large number of the credits will go to corporations, so the total available to individuals will be well under 30,000. And whatever number is left will eventually be priced very high. Michael Novogradac, author of the Low-Income Housing Tax Credit Handbook and a member of the Spectrum Tax Consulting Group in San Francisco, predicts: "There will be a race for the product and that is what is going to categorize the market for the next four or five months. That is, who has the credits and what kind of price you can get for them. With only 30,000 investors, once you have the credit, it will be a very hot commodity." The credits are divided among the states, based on relative population. In 1989, for example, California had $35.2 million dollars in tax credits: Utah, $2.1 million. In California last year, the state had used up its total allocation in three months. What happened? Quite simply, the number crunchers discovered Low Income Housing Credits were a good deal. Essentially, for every 30 cents the developer puts up, the government tosses in 70 cents. The credits will be even more popular as time goes on. Previously, individuals with passive income could receive the credits' significant tax benefits only if their adjusted gross incomes were below $250,000. Now, any wealthy individual can invest, vastly opening the market for these credits. Now, Novogradac says, wealthy individuals should consider investing as much as $40,000-$45,000 in these Low-Income Housing Credits.
LOS ANGELES BUSINESS JOURNAL
AFFORDABLE HOUSING MAY BE BUILDER'S SAVIOR
The elixir is affordable housing. And it could be the only niche to see any significant action in the near-term future. This (affordable housing) is the one area of real estate that needs to be expanded right now.
The amount of affordable housing construction going on in recent years was relatively small and was handled almost exclusively by Nonprofit developers. Unlike private projects, which are typically funded by one or two major sources, most successful affordable housing projects depend on financing from several public sources. Coordinating those sources is crucial and usually complex. Making matters even more complex and potentially profitable is the fact that direct subsidy money is only one of several incentives public agencies are using to entice developers into affordable housing. Others include: Tax-exempt financing, density bonuses, reduced parking requirements, donations of government-owned land and low-income housing tax credits. Each of these individually and in combination can be used to lower per-unit construction costs and thereby increase profits. Unfortunately, knowing which of these incentives are available in a given area, and how to go about getting them is usually a monumental task requiring years of experience. Hence, private developers might be well advised to consider teaming up with an experienced Nonprofit developer who knows the ropes, experts say. In such a joint venture, Nonprofits could contribute their expertise in securing financing and entitlements, and for-profits could contribute their considerable manpower and resources.
LOS ANGELES TIMES
Managing Money
THE LAST BIG TAX SHELTER: LOW-INCOME HOUSING
Since the 1986 Tax Reform bill, accountants and investors have lamented the loss of most of the good tax shelters. But there's one exception, one remaining tax shelter that allows you to get back more in tax savings than you invested: Low-Income Housing.
In an effort to support construction of housing for the poor, Congress specifically provided for tax credits, dollar-for-dollar tax savings, for those who invest in specific projects. You don't have to be rich to invest in low-income housing either. Often these deals are syndicated through limited partnerships. How much it takes to get in varies with each deal.
THE WASHINGTON POST
FREE OF HUD, SOME HOUSING TAX CREDITS WORK AS THEY'RE SUPPOSED TO
It turns out there is a national housing program that (1) has nothing to do with HUD, and (2) houses poor people fast, well, and honestly. It's called the Low-Income Housing Tax Credit. It's supervised by the Treasury department, not HUD. "You can make a good solid return on these investments," says David Maxwell, chairman of the Federal National Mortgage Association (Fannie Mae).
SPIRIT MAGAZINE
In The Money
GIMME SHELTER
Joseph J. Vizzini, a Certified Financial Planner, describes it as "a no-brainer for anyone who wants to pay less income tax." Cliff Carper, a Senior Vice-President of Kemper Securities, calls it "literally a gift to taxpayers from the Internal Revenue Service and Congress." And, Thomas Gau president of Kavesh and Gau, dubs it "the only true tax shelter that is still legal and still available."
The "it" these experts are so enthusiastic about is a little-known section of the U.S. Tax Code that awards tax credits for investments that provide affordable housing to people of low and moderate incomes.
Tax credits are different from the more-familiar tax deductions that millions of taxpayers itemize on Schedule A. Deductions lower the amount of income that is taxed, whereas credits reduce the amount of the tax itself. The distinction is subtle but important. Since personal income currently is taxed at either twenty-eight percent or thirty-one percent, a $1,000 deduction shelters $1,000 of income from taxation, but the tax savings amounts to only $280 or $310. In contrast, a $1,000 tax credit saves $1,000 in taxes.
Tax deductions can be claimed only by people with enough mortgage interest, allowable medical expenses, and/or charitable donations to exceed the standard deduction. Tax credits, on the other hand, are available to everyone. In addition, tax credits can help many businesses lower their corporate-tax liability.
People who bought the old tax shelters learned in 1986, to their dismay, that Congress could pull the rug out from under them by eliminating their tax benefits in midstream. That can't happen with affordable housing tax credits. "All ten years of the credits are pre-funded in the first year," Carper points out. "So even if the rules later change, existing credits are safe."