From
an investor viewpoint, what is the attraction of the Federal
Housing Tax Credit program?
The benefits of an investment are twofold: (1) Tax Credits allow investors to reduce their bottom line tax liability and (2) Tax Credits offer investors the chance to acquire valuable real estate and thereby build net worth with dollars otherwise lost to taxes.
What is the difference between a Tax Credit and a
tax deduction?
A Tax Credit is a dollar-for-dollar reduction of a taxpayer's tax liability. A Tax Credit is subtracted from the Federal Income Tax due after the amount of taxes has been calculated. A tax deduction is a reduction of income subject to taxation before the calculation of the Federal Income Tax due.
What affect does a Tax Credit have?
A Tax Credit directly offsets Dollar-for-Dollar Federal Income Taxes owed. Therefore, the "tax bracket" an individual or business is subject to, affects only the annual amount of tax credits that can be used, not their value.
What makes a property an Affordable Housing Tax
Credit property?
A minimum number of units must satisfy one of the two minimum set-aside tests. Either:
(A) a minimum of 20% of the units are rent-restricted and are occupied by eligible tenants who have an income of 50% or less of the Area Median Income, or
(B) a minimum of 40% of the units are rent-restricted and are occupied by tenants who have an income of 60% or less of the Area Median Income.
If either of these gross tests are satisfied, the property is eligible to receive Tax Credits.
What is a rent-restricted unit?
A residential unit is rent-restricted if the gross rent for such unit does not exceed 30% of the limitation under the elected minimum set-aside test.
Can I use the Tax Credits immediately, or do I have
to wait until I file next year?
Yes, you can take immediate advantage of the benefits of having Tax Credits by either reducing your quarterly estimated tax payments or by increasing your withholding allowances, thereby reducing your payroll tax withholding and receiving a larger paycheck.
What type of properties are typically acquired by
Federal Housing Tax Credit partnerships?
Tax Credit partnerships participate in ventures with developers and non-profit organizations that create affordable housing for senior citizens, disabled veterans and low and medium-income working families.
Why a limited partnership?
Because of the large volume of Tax Credits that these properties generate and the lack of ability for an individual and most corporations to use all of the Annual Tax Credit allotment, Tax Credit properties are owned by more than one entity. IRS Regulations dictate the use of one of three vehicles to be used for the pass-through of Tax Credits to multiple entities. They are Corporations, Partnerships or Limited Partnerships. A Corporation using stock for shareholders (Investors) is only feasible in rare situations, and it is impractical to have a Partnership with hundreds of equal-voting Partners (Investors). Therefore, because of the need to allocate the Tax Credits to more than one entity, the preferred method for structuring a Tax Credit Program is through the formation of a Limited Partnership. This allows an Investor to limit their liability while purchasing only the Tax Credits and the benefits associated with the Tax Credits.
What type of income will I earn by making this real
estate investment?
Substantially, all income generated by these Tax Credit partnerships is considered passive income.
How does a property generate sheltered cash flow?
The law allows for real estate to be depreciated over time. The depreciation expense may be used to offset property income dollar for dollar, thereby sheltering property cash flow from taxes. In those years when depreciation expense exceeds property income, excess depreciation can be used to offset passive income from other sources. In those years where expenses exceed income, and no other passive income is available, losses may be carried forward to offset taxes on passive income earned in future years.
What if I can't use all of my Tax Credits in one
year?
Tax credits can be carried back one year and may be carried forward up to twenty years from the year they are earned.
To whom are Tax Credits most appealing?
-TAXPAYERS concerned about reducing their Federal Income Tax burden.
-INDIVIDUALS who want to offset the tax related to the withdrawal of funds from their retirement accounts.
-INDIVIDUALS who would like tax free cash.
-ANNUITY HOLDERS who wish to annuitize and have the resulting taxes offset.
-SOCIALLY CONSCIOUS INVESTORS who can financially benefit as well as meet their philanthropic goals.
-CORPORATIONS seeking to reduce their tax burdens. Generally, corporate investors are unlimited in their use of Tax Credits and losses.