Qualifying for the Acquisition Tax Credit - Who Can You Sell To? When Can You Sell? IPED Boston, October 2007

1. Qualifying for the Acquisition Tax Credit - Who Can You Sell To? When Can You Sell?IPEDBoston, October 2007 Forrest David Milder 617-345-1055 fmilder@nixonpeabody.com

2. Overview • In order to qualify for the acquisition credit, several tests must be passed – • Rules having to do with “purchase”. • Rules having to do with previous placement in service within the past 10 years. • The 15-year rule

3. Rules having to do with “purchase” • The building must be purchased. • Gifts, estate transfers, and contributions to the capital of a partnership or corporation don’t count. • Note: Don’t forget “step into the shoes”, but the person who gets the credit allocationhas to have a purchase.

4. Timing of the unrelated test The seller must be “unrelated” at two times: • the time of sale (i.e. today), and • at any time the building was previously placed in service (e.g., ten years ago)

5. Definition of “Related person” • Use the rules of Sections 267 and 707, but the test is “more than 10% common ownership”, not the 50% that would otherwise apply in those sections. For partnerships, the test is “more than 10% of profits OR capital”. • Be sure to examine other related parties, e.g., family members. A popular alternative is an employee of the former owner, but this requires great caution.

6. More on Related Persons • Be sure to consider both GPs and LPs. The test is not partner-by-partner. So, if one person owned 9% of the seller and 5% of the buyer, and another person owned 2% of seller and 6% of buyer, this fails the related party test. • Be sure to consider incentive fees, etc. For example, if the GP gets 90% of cash flow as an incentive fee, most tax advisor think that this is likely to be treated as a 90% interest in profits.

7. Placement in Service in the Past 10 Years The property must have not been placed in service within the past 10 years. • Any placement in service can count (e.g., as a factory), and not just as residential housing • “Nonqualified substantial improvements” could also be a problem; but, it’s hard to imagine that these could still apply (has to be pre-86 or 167(k) depreciation)

8. The Six Primary Exceptions (1-3) • Carryover basis transactions, e.g., gifts or partnership contributions, • Transfers on death, • Placed in Service (“PIS”) by governmental units or qualified nonprofits (but only if last placed in service at least 10 years earlier and the income is not unrelated business income),

9. The Six Primary Exceptions (4-6) • PIS following foreclosure of a purchase money mortgage if resold within 12 months. • PIS as a personal residence. • A taxpayer can apply to the IRS for a waiver of the 10-year rule if the transfer is necessary to avoid transfer of a HUD or FHA mortgage or to avert a claim against a federal mortgage ins. fund

10. Transfers of Partnership interests • Section 708 provides that a transfer of 50% or more of the partnership interests in profits or capital in a 12-month period terminates the partnership • So, there would seem to be a new placement in service by the “new partnership”.

11. Change in the Partnership Rules • The Section 708 regulations were amended with respect to transfers of partnership interests after May 9, 1997. • They still cause a new placement in service, but now, there’s a carryover basis, so that the placement in service qualifies for that exception from the 10-year rule. • Since the regulations became effective more than 10 years ago, partnership transfers almost never cause a failure of the 10-year test.

12. Other Partnership Rules • Even a Section 754 election does not cause the transfer to fail the 10-year test. See PLR 200614019, in the materials. • Still have to watch out for transfer to a single member LLC. This is treated as a sale to the single member.

13. The 15-year rule If the LIHTC was allowed for a building, then there can’t be an acquisition credit until the previous compliance period ends.

14. Remember: • Verify that the property was actually placed in service. There may have been transfers in the past 10 years by people who kept the property vacant, so that they don’t fail the 10-year test. • These rules only apply to the acquisition credit; these rules do not apply to the rehabilitation credit, or to sales of land that will be part of new construction

15. Like Kind Exchangesfor Low Income Housing ProjectsForrest MilderIPED Boston October 11, 2007

16. Investor Limited Partnership (Limited Partner) Sponsor Entity (General Partner) Sponsor Entity 2 Qualified Intermediary Operating Partnership Credit Tenant Property Owner Housing Project Credit Tenant Property Like-Kind Exchange Model

17. Sponsor Entity 2 Housing Project Credit Tenant Property Like-Kind Exchange Model (cont.) Investor Limited Partnership (Limited Partner) Sponsor Entity 1 (General Partner) Operating Partnership

18. Optimal Projects • Large Negative Capital Accounts • Low Basis • Properties With Low Net Value • Economic Opportunity to Unlock

19. Optimal Projects Economic Opportunity to Unlock • Section 42 Resyndication • last placed in service at least 10 years ago • rehabilitation of at least $3,000 per unit or 10% of basis • credit allocation or volume cap bonds • Refinancing/restructuring of debt