What To Do At The End Of The Housing Tax Credit

Association of Construction and Development
April 8, 2014 — 1,552 views  

Attorneys, presidents, vice presidents, contractors, subcontractors, engineers, architects, construction and project managers, and developers all need Housing Tax Credit (HTC). HTC helps these professionals develop affordable low income housing, that are made available at lower cost rents. Housing tax credit is the investment in, and development of, affordable rental homes. Credits are awarded to developers of housing projects. They sell these credits to prospective investors (creditors) to raise capital to fund the project, which saves the developers (debtors) from having to borrow the same.

There are several options available to the owners of tax credit projects, once the compliance period ends. Usually the developer sells the credits directly to the investor, or to a syndicator, who acts as the representative for a group of investors. The credit purchaser is always part owner in the housing property, either by creating a limited liability partnership, or a limited liability company. In both the conditions, the credit purchaser or investor holds a 99 percent stake and is involved in the management of the project.

Claiming the tax credits

Typically, the tax credits can be claimed annually over a period of 10 years by the owner of the property, who is usually the investor or credit purchaser. The period of claim begins from the year in which the property, and its units are ready to be occupied. The developer can sometimes need money immediately to fund the costs of development. In such cases, the developer can accordingly sell the rights attached to the future credits to the investor in exchange for immediate cash.

Avoiding tax consequences

An option to avoid tax consequences is that the owners can reduce their taxable income by allowing deductions for depreciation. Owners of these properties must maintain the property’s ability of low income generation for at least 15 years to fully earn back tax credits. For all projects that received credits after 1989, a15-year extended compliance period has been made available. Once this 15- year period is over, the Internal Revenue Service may not take the tax credits into consideration again, and the investors can exit the ownership, as long as the properties offer affordable housing till the end of the 15th year. However, if investors exit the ownership in the first 10 years of the credit period, they will not be allowed to claim any remaining credits for the balance period. 

  

Association of Construction and Development