2003-03-12 CC Packet - Laserfiche WebLink

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What OtMr RBstrictioftS Apply? Man~othertllaILthe be-ItefifS described above must be taken into accoUnt before considering undertak- ing or investing in a rehabilitation project. The rehabilitation' incentives operate within the,context of a building's'loca1 real estate market, its economic profile, and project investors' individual tax situations. The following sections discuss some of the federal.tax provisions that may affect the ability of investors to make full use of the tax benefits. Taxpayers should seek the advice of a profes- sional advisor before initiating or investing in a rehabilitation project. Recapture of the Credit e Generally, if a taxpayer disposes of a b~ilding for which a rehabilitation credit has been claimed within five years of completip.g a rehabilitation, part or all of the credit claimed muSt be repaid. This ~reCaptureci" amount ' ranges from 100 percent of the credit claimed for property sold within one year of the completion date to 20 percent of the credit claimed for property sold in the fifth ye~. Similar rules. apply if all, or part of a rehabili- tated building becomes "tax-exempt use property" (see page 8) within five Many older ftl1'm lntiltJing,r Iutve been rehabilitated using the ifJ'OflStment tax credit such tIS the Walnut Grove F tI1'm oarn in Knoxville, II/inois. .;..t_..; """,.'. .,o!.... years of the placed-in-service date. Recapture of the credit could also . _ OCCJU' if_t:he_Se~retmYof.th~ Interior revokes certification after the rehabili- tation is. completed. At Risk Rules Taxpayers generally may deduct losses from an acti~ty, including the holding of real estate, up to the' amount the taxpayer has "at-risk" in the activity. The amount at-risk generally includes the taxpayer's contribution of cash or property to.the activity and amounts borrowed for use in the activity for which the taxpayer is personally liable. In addition, certain borrowed amounts' secured by the real estate used in the activity for which the taxpayer is not personally liable may be treated as 'at- risk. This allows investors in rehabili- tation projects to "leverage" their cash inves.cment by receiving tax benefits .Oil their investment and a p~o-raca share of a project's borrowed funds.' Passive Ae1Mty Rules In the Tax Reform Act of 1986, Congress for the first time restricted the ability of real estate developers and investors to use deductions and credits to "shelter" income other than . that directly related to the .deductio~ or credits. . Corporations by and large .8!e. ngtcoveJ~4 by the~e rul~.___ Geiieriilly, these rules prohibit the use of deductionS and credits from "pas- sive activities" to offset income and taxes owed from "noD-:passive activi- ties." Passive activities are those in which the taxPayer is not involved on a regular, continuous, and substantial basis. Limited partner investors in rehabilitation projects are presumed to be involved in a passive activity. In addition, rental activities, including the rental of rehabilitated buildings, are considered passive activities. Non-passive activity income includ~ wages and portfolio income such as stock. dividends, stock capital gains, and interest on bank accounts: Under these limitations, deductions generated by all of a taxpayer's passive ,investments may only be deducted from income fr~m these passive invClltmentSl ~iinilarly, credits gener": " ated from passive activities, such as the rehabilitation credit, may only be used to offset tax liability on income from ~ive activities. I Credits and dedu,ctions that cannot be usea because of the passive activity rules may be used in future years to offset income or taxes from passive .