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USDA Rural Development Northeast Regional Buyers and Sellers Conference

USDA Rural Development Northeast Regional Buyers and Sellers Conference. Tim Flaherty, CPA Salmin, Celona, Wehrle & Flaherty, LLP. Marc Fecteau, CPA Fecteau, PLLC. Tax Issues When Buying and Selling . Use of Low Income Housing Tax Credit (LIHC).

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USDA Rural Development Northeast Regional Buyers and Sellers Conference

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  1. USDA Rural Development Northeast Regional Buyers and Sellers Conference

  2. Tim Flaherty, CPA Salmin, Celona, Wehrle & Flaherty, LLP Marc Fecteau, CPA Fecteau, PLLC Tax Issues When Buying and Selling

  3. Use of Low Income Housing Tax Credit (LIHC) • Used for new construction and acquisition & rehabilitations • 9% vs. 4% credit • Tax-exempt bond financing (TEBs) = automatic allocation of 4% credits (as-of-right credits) • Various requirements to meet TEB status

  4. Aggregate Basis • At least 50% of the cost of the project must be financed by tax exempt bond financing • Need to be careful w/ use of proceeds • Watch for when RD or other debt assumed • Need to be careful with timing of this analysis

  5. Assuming Debt with Loan Modifications • Original Issue Discount rules could apply • RD loan term extensions/re-amortizations/deferrals • This would cause a reduction of eligible basis • Old & cold concept • Treasury is currently relaxed on this issue

  6. 708 Terminations • IRS rule: a partnership ends when more than 50% of the ownership changes within 12 consecutive months for LLC’s and partnerships. • The old entity dies and a new one instantly created for depreciation calculations. • Result: depreciation deductions could be lower for the new owners.

  7. 754/743 Elections • A method to increase depreciable basis in a “cross purchase” transaction. • Can allocate depreciation on a portion of the purchase price to the buyer. • Can serve as an added factor in calculating your ROI.

  8. Related Party Rules on Acquisition & Rehabilitation Deals • To claim LIHC for acquisition, seller and the buyer cannot be “related” • Analysis is aggregate of all owners for both seller and buyer • Ownership includes percent of cash flows (both operating and residual), not just percent interest • Threshold for pre-HERA 2008 was more than 10%; post- HERA 2008 is now 50%

  9. The Negative Capital Account • A negative capital account balance could cause a capital gain on sale….even is no cash is received. • Look at your last k-1 to see if the account has a negative ending balance. • Federal and state capital gains tax rates are 15% and 9% respectively.

  10. Waterfall Issues and Special Allocations • Seller will want total comprehension of the cash “waterfall” when a project is sold to determine the flow of cash. • Watch for special allocations to or from the GP in the selling entity from sales proceeds. • Watch your balance sheet for old debts that may need to be cleared before sales proceeds may be distributed.

  11. Acquisition Entity Selection: C/S/PS & LLC differences • Primary entities used to purchase properties are LLC’s and partnerships; C and S corporations are now rarely used. • Huge differences between “pass-through” entities and C & S corporations. • Partnerships and LLC’s offer more room to maneuver than corporations.

  12. Depreciation Recapture • Depreciation in excess of “straight line” can be taxed as ordinary income on the sale of property. • 100% of the “excess” depreciation taxed in the year of sale even if you do an installment sale! • Properties that use cost segregation are at a higher risk.

  13. Cost Segregation • The “segregation” of the shell from selected site assets. • Flooring, site improvements, appliances are good examples of items depreciated much faster than the 27.5 years the building will be depreciated over. • Can generate recapture if you are not in it for the long run.

  14. Deferred Development Fees • Deferred Fee can be tax credit eligible • The deferred fee has to look, smell and feel like a real debt • GP/MM guarantees and phantom income • Possible “at risk” basis issue

  15. Residual Analysis • Bona-fide debt requires a reasonable expectation to be be repaid • Prepare residual value analysis using reasonable assumptions • If not bona-fide debt, a portion of the loan will be taxable income (deemed grant)

  16. Working Through Rent Increases • In an acquisition/rehabilitation there generally will be some new debt • Need to make sure that you can get rent increases to cover the new debt service requirement • Agencies may require slower increases for unassisted units

  17. Minimum Gain • Limits the losses a partner can claim and transfers those losses to the GP. • Can effect the ROI the investor partner is planning for. • Can radically effect the GP capital account.

  18. HERA 2008 • Fixes 9% credit at 9% through PIS 12/31/13 • Federally sourced, below market rate interest loans no longer taint the credit rate or eligible basis • Other favorable “pro-affordable housing” (and related investment) provisions

  19. ARRA 2009 • LIHC Exchange (NYS opted out) • TCAP Funds • DOE WAP Funds • Energy incentives including “grant-in-lieu” • Other favorable “pro-affordable housing” (and related investment) provisions

  20. What’s in the hopper for 2010 • Still being debated in Congress, therefore no legislation or extensions of certain HERA/ARRA features are law yet • Extension of LIHC Exchange is in current proposed legislation • Who knows?

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