Friday, February 19, 2010
Thursday, February 18, 2010
Low Income Housing Tax Credit
The Low Income Housing Tax Credit (LIHTC; pronounced “ly-tech”) is a tax credit created under the Tax Reform Act of 1986 (TRA86) that gives incentives for the utilization of private equity in the development of affordable housing aimed at low-income Americans. The credits are also commonly called Section 42 credits in reference to the applicable section of the Internal Revenue Code. The tax credits are more attractive than tax deductions as they provide a dollar-for-dollar reduction in a taxpayer’s federal income tax, whereas a tax deduction only provides a reduction in taxable income.
As of 2006, 40% of all new multifamily construction projects received section 42 credits.
How it Works
The LIHTC provides funding for the development costs of low-income housing by allowing a taxpayer (usually the partners of a partnership that owns the housing) to take a federal tax credit equal to a large percentage of the cost incurred for development of the low-income units in a rental housing project. Development capital is raised by “syndicating” the credit to an investor or, more commonly, a group of investors.
To take advantage of the LIHTC, a developer will typically propose a project to a state agency, seek and win a competitive allocation of tax credits, complete the project, certify its cost, and rent-up the project to low income tenants. Simultaneously, an investor will be found that will make a “capital contribution” to the partnership or limited liability company that owns the project in exchange for being “allocated” the entity’s LIHTCs over a ten year period.
The amount of the credit will be based on (i) the amount of credits awarded to the project in the competition, (ii) the actual cost of the project, (iii) the tax credit rate announced by the IRS, and (iv) the percentage of the project’s units that are rented to low income tenants. Failure to comply with the applicable rules, or a sale of the project or an ownership interest before the end of at least a 15-year period, can lead to recapture of credits previously taken, as well as the inability to take future credits.
Application Process
The first step in the process is for a project owner to submit an application to a state authority. The application will include estimates of the expected cost of the project and a commitment to comply with either of the following conditions, known as “set-asides”:
* At least 20% or more of the residential units in the development are both rent restricted and occupied by individuals whose income is 50% or less of the area median gross income.
* At least 40% or more of the residential units in the development are both rent restricted and occupied by individuals whose income is 60% or less of the area median gross income.
Typically, the project owner will agree to a higher percentage of low income usage than these minimums, up to 100%. Low income tenants can be charged a maximum rent of 30% of the maximum eligible income, which is 60% of the area’s median income adjusted for household size as determined by HUD. There are no limits on the rents that can be charged to tenants who are not low income but live in the same project.
Here Are Some More Frequently Asked Questions
When and why was the Low-Income Housing Tax Credit Program created?
In the early 1980s, the federal government eliminated many publicly funded housing-development programs. To help offset the resulting loss in the production of affordable housing, Congress passed the Low-Income Housing Tax Credit (LIHTC) program. Part of the Tax Reform Act of 1986, the LIHTC program provides an incentive to the private sector to invest in low-income multifamily housing. The program gives investors a dollar-for-dollar reduction in their federal tax liability in exchange for providing financing to develop affordable rental housing.
Today the Low-Income Housing Tax Credit program is the only federal affordable rental housing production program available to developers. Currently it provides more than $400 million in annual subsidies for developing low-income rental housing. Since the national program went into effect, a number of states have established their own LIHTC programs.
Who administers the LIHTC program?
The Internal Revenue Service (IRS) oversees the LIHTC program, but most administrative and monitoring responsibilities have been delegated to the states. Each state receives an annual allotment of tax credits based on the size of its population. For 2008 and 2009 the state volume cap is $2.20 per resident or $2,557,500, whichever is greater.
State agencies review and rank tax credit applications submitted by developers and allocate credits to the highest-scoring affordable housing projects. Each state sets its own criteria for awarding credits to proposed projects and lists the criteria in a document called the “Qualified Allocation Plan” (QAP). The IRS requires that QAPs prioritize projects that serve the lowest-income tenants and ensure affordable housing for the longest period. The law also requires that states set aside a minimum of 10 percent of their allotted credits for nonprofit developers/owners.
The allocation process is highly competitive. Some states can receive applications requesting as many as three times or more credits than they have authority to allocate.
How does the low-income housing tax credit program work?
Most developers who receive an allocation from their states sell their tax credits to corporate investors (and in some cases individuals) for cash. By investing in LIHTC developments, corporations (or individuals) can then claim the tax credit on their income tax returns over a 10-year period and thereby reduce their tax liability. Federally regulated financial institutions (e.g., banks and savings institutions) not only reduce their tax liability when they invest in LIHTC projects; they also receive, as an additional incentive, Community Reinvestment Act (CRA) credit.
The money developers receive from the sale of tax credits is in the form of an equity contribution that is used to pay costs related to the project. By receiving equity capital, developers can reduce the sum they need to borrow and, consequently, their debt service costs. Typically, the amount of equity raised from the sale of tax credits ranges from 50% to 55% of the total development costs. These savings allow the developer to charge below-market-rate rents.
Are there any limitations placed on the rent that owners of LIHTC properties may charge?
Yes. First of all, to be eligible to participate in the LIHTC program, projects must meet either of the following requirements: at least 20 percent of the units must be rented to households whose incomes do not exceed 50 percent of the area median income (AMI) or at least 40 percent of the units must be set aside for households whose incomes do not exceed 60 percent of the AMI. In practice, usually 100 percent of the units in a development qualify for LIHTCs.
The Department of Housing and Urban Development (HUD) calculates the area median income for each county in each state. Low-income rents, including utilities, are restricted based on family size, the number of bedrooms in the apartment, and the AMI. In all cases, the project owner cannot charge a rent that is greater than 30 percent of a qualified tenant’s income (i.e., 30 percent of 50 or 60 percent of AMI).
By statute LIHTC projects must adhere to the rent restrictions for a minimum of 15 years (also known as the “compliance period”). Most states include an additional 15 years through an extended use agreement. The long-term structure of tax credits helps ensure that the units remain available for low-income occupancy for at least fifteen years. Should the number of low-income units drop below the required percentages within the first fifteen years, the number of tax credits available to the investor is reduced.
Are there any limitations on the types of projects tax credits can be used for?
Tax credits can be used to finance family projects and developments serving elderly residents, the homeless, or disabled individuals as well as other special needs groups. It is important for developers to be familiar with their states’ QAPs, for when reviewing and ranking applications, some states award points to projects that give priority to meeting the needs of specific population groups.
If a developer wants to build a rental project using Low-Income Housing Tax Credits, what steps should be followed?
First, the developer should obtain a copy of the QAP from the state allocating agency where the project will be built and become thoroughly familiar with its contents. Second, the developer should get a copy of the tax credit application and find out the date(s) for submittal. Third, if the developer, even an experienced developer, has never built a tax credit project, it is strongly recommended that an experienced consultant be retained to assist with the preparation of the application, project structuring, financing, and other matters unique to the tax credit program.
Tax credits are big business and for a lucky few, can mean big cash. Something to think about if you are exploring multifamily rehab or development.
Tuesday, February 16, 2010
Protect Yourself With a Buyers Agent
ADVANTAGES OF A BUYER AGENCY AGREEMENT
YOUR INTERESTS ARE PROFESSIONALLY REPRESENTED
Enlisting the services of a professional Buyer’s Agent is similar to using an accountant to help you with your taxes, a doctor to help you with your health care, or a mechanic to help you with your car. If you had the time to devote to learning everything about accounting, medicine, and automotive mechanics, you could perform these services yourself. But seriously, who has time for such endeavors? This is why you enlist the help of proven professionals.
Your real estate agent will take care of the hassles of everyday real estate transactions for you, allowing you to concentrate on your full-time job, while guiding you through the home-buying process.
Agents exclusively represent your interests as they help you find a home, present your contract offer, negotiate, and close on your home.
YOU GET A PERSONAL SPECIALIST WHO UNDERSTANDS YOUR HOME OWNERSHIP NEEDS
Just as your accountant, doctor, and mechanic understand your specific needs, your Buyer’s Agent understands your real estate needs and concerns. And they achieve this type of understanding through open communication at all times. Your Buyer’s Agent will save you a lot of time by providing you the needed details about a potentially interesting home before you see it. In addition, your Buyer’s Agent will listen to your feedback and concerns about each home.
YOU WILL GET THE HOME YOU WANT WITH AS LITTLE HASSLE AS POSSIBLE
The advantage of signing a Buyer’s Agency Agreement is that you will have a professional agent working to find and secure the ideal home for you. It is nearly impossible to find a home that meets your exact needs, get a contract negotiated, and close the transaction without an experienced agent.
You won’t need to spend endless evenings and weekends driving around looking for homes or trying to search websites by yourself. When you tour homes with your professional Buyer’s Agent, you will already know that the homes meet your criteria and are within your price range.
BEST OF ALL, THE BUYER’S AGENCY AGREEMENT IS USUALLY FREE OF CHARGE
Entering into a Buyer’s Agency Agreement has countless advantages. When you sign the agreement, you are simply agreeing to “hire” a personal representative who, by law, must represent your best interests to the best of his or her ability. All of this personal se
rvice is generally available at absolutely NO COST TO YOU! In many states and provinces, the Seller’s Agent is responsible for paying your Buyer’s Agent fee. So, you get a professional agent devoted to protecting your needs and to helping you make one of the most important investment decisions of your life, and usually for free.
Monday, February 15, 2010
First Time Home Buy Tax Credit
Frequently Asked Questions About the Home Buyer Tax Credit
The American Recovery and Reinvestment Act of 2009 authorizes a tax credit of up to $8,000 for qualified first-time home buyers purchasing a principal residence on or after January 1, 2009 and before December 1, 2009.
The following questions and answers provide basic information about the tax credit. If you have more specific questions, we strongly encourage you to consult a qualified tax advisor or legal professional about your unique situation.
1. Who is eligible to claim the tax credit?
First-time home buyers purchasing any kind of home—new or resale—are eligible for the tax credit. To qualify for the tax credit, a home purchase must occur on or after January 1, 2009 and before December 1, 2009. For the purposes of the tax credit, the purchase date is the date when closing occurs and the title to the property transfers to the home owner.
2. What is the definition of a first-time home buyer?
The law defines "first-time home buyer" as a buyer who has not owned a principal residence during the three-year period prior to the purchase. For married taxpayers, the law tests the homeownership history of both the home buyer and his/her spouse. For example, if you have not owned a home in the past three years but your spouse has owned a principal residence, neither you nor your spouse qualifies for the first-time home buyer tax credit.
However, unmarried joint purchasers may allocate the credit amount to any buyer who qualifies as a first-time buyer, such as may occur if a parent jointly purchases a home with a son or daughter. Ownership of a vacation home or rental property not used as a principal residence does not disqualify a buyer as a first-time home buyer.
3. How is the amount of the tax credit determined?
The tax credit is equal to 10 percent of the home’s purchase price up to a maximum of $8,000.
4. Are there any income limits for claiming the tax credit?
The tax credit amount is reduced for buyers with a modified adjusted gross income (MAGI) of more than $75,000 for single taxpayers and $150,000 for married taxpayers filing a joint return. The tax credit amount is reduced to zero for taxpayers with MAGI of more than $95,000 (single) or $170,000 (married) and is reduced proportionally for taxpayers with MAGIs between these amounts.
5. What is "modified adjusted gross income"?
Modified adjusted gross income or MAGI is defined by the IRS. To find it, a taxpayer must first determine "adjusted gross income" or AGI. AGI is total income for a year minus certain deductions (known as "adjustments" or "above-the-line deductions"), but before itemized deductions from Schedule A or personal exemptions are subtracted. On Forms 1040 and 1040A, AGI is the last number on page 1 and first number on page 2 of the form. For Form 1040-EZ, AGI appears on line 4 (as of 2007). Note that AGI includes all forms of income including wages, salaries, interest income, dividends and capital gains.
To determine modified adjusted gross income (MAGI), add to AGI certain amounts such as foreign income, foreign-housing deductions, student-loan deductions, IRA-contribution deductions and deductions for higher-education costs.
6. If my modified adjusted gross income (MAGI) is above the limit, do I qualify for any tax credit?
Possibly. It depends on your income. Partial credits of less than $8,000 are available for some taxpayers whose MAGI exceeds the phaseout limits.
7. Can you give me an example of how the partial tax credit is determined?
Just as an example, assume that a married couple has a modified adjusted gross income of $160,000.
The applicable phaseout to qualify for the tax credit is $150,000, and the couple is $10,000 over this amount. Dividing $10,000 by $20,000 yields 0.5. When you subtract 0.5 from 1.0, the result is 0.5. To determine the amount of the partial first-time home buyer tax credit that is available to this couple, multiply $8,000 by 0.5. The result is $4,000. Here’s another example: assume that an individual home buyer has a modified adjusted gross income of $88,000. The buyer’s income exceeds $75,000 by $13,000. Dividing $13,000 by $20,000 yields 0.65. When you subtract 0.65 from 1.0, the result is 0.35. Multiplying $8,000 by 0.35 shows that the buyer is eligible for a partial tax credit of $2,800.
Please remember that these examples are intended to provide a general idea of how the tax credit might be applied in different circumstances. You should always consult your tax advisor for informtion relating to your specific circumstances.
8. How is this home buyer tax credit different from the tax credit that Congress enacted in July of 2008? The most significant difference is that this tax credit does not have to be repaid. Because it had to be repaid, the previous "credit" was essentially an interest-free loan. This tax incentive is a true tax credit.
However, home buyers must use the residence as a principal residence for at least three years or face recapture of the tax credit amount. Certain exceptions apply.
9. How do I claim the tax credit? Do I need to complete a form or application?
Participating in the tax credit program is easy. You claim the tax credit on your federal income tax return. Specifically, home buyers should complete IRS Form 5405 to determine their tax credit amount, and then claim this amount on Line 69 of their 1040 income tax return. No other applications or forms are required, and no pre-approval is necessary. However, you will want to be sure that you qualify for the credit under the income limits and first-time home buyer tests.
10. What types of homes will qualify for the tax credit?
Any home that will be used as a principal residence will qualify for the credit. This includes single-family detached homes, attached homes like townhouses and condominiums, manufactured homes (also known as mobile homes) and houseboats. The definition of principal residence is identical to the one used to determine whether you may qualify for the $250,000 / $500,000 capital gain tax exclusion for principal residences.
11. I read that the tax credit is "refundable." What does that mean?
The fact that the credit is refundable means that the home buyer credit can be claimed even if the taxpayer has little or no federal income tax liability to offset. Typically this involves the government sending the taxpayer a check for a portion or even all of the amount of the refundable tax credit.
For example, if a qualified home buyer expected, notwithstanding the tax credit, federal income tax liability of $5,000 and had tax withholding of $4,000 for the year, then without the tax credit the taxpayer would owe the IRS $1,000 on April 15th. Suppose now that the taxpayer qualified for the $8,000 home buyer tax credit. As a result, the taxpayer would receive a check for $7,000 ($8,000 minus the $1,000 owed).
12. I purchased a home in early 2009 and have already filed to receive the $7,500 tax credit on my 2008 tax returns.
How can I claim the new $8,000 tax credit instead?
Home buyers in this situation may file an amended 2008 tax return with a 1040X form. You should consult with a tax advisor to ensure you file this return properly.
13. Instead of buying a new home from a home builder, I hired a contractor to construct a home on a lot that I already own.
Do I still qualify for the tax credit?
Yes. For the purposes of the home buyer tax credit, a principal residence that is constructed by the home owner is treated by the tax code as having been "purchased" on the date the owner first occupies the house. In this situation, the date of first occupancy must be on or after January 1, 2009 and before December 1, 2009. In contrast, for newly-constructed homes bought from a home builder, eligibility for the tax credit is determined by the settlement date.
14. Can I claim the tax credit if I finance the purchase of my home under a mortgage revenue bond (MRB) program?
Yes. The tax credit can be combined with the MRB home buyer program. Note that first-time home buyers who purchased a home in 2008 may not claim the tax credit if they are participating in an MRB program.
15. I live in the District of Columbia. Can I claim both the Washington, D.C. first-time home buyer credit and this new credit?
No. You can claim only one.
16. I am not a U.S. citizen. Can I claim the tax credit?
Maybe. Anyone who is not a nonresident alien (as defined by the IRS), who has not owned a principal residence in the previous three years and who meets the income limits test may claim the tax credit for a qualified home purchase. The IRS provides a definition of "nonresident alien" in IRS Publication 519.
17. Is a tax credit the same as a tax deduction?
No. A tax credit is a dollar-for-dollar reduction in what the taxpayer owes. That means that a taxpayer who owes $8,000 in income taxes and who receives an $8,000 tax credit would owe nothing to the IRS.
A tax deduction is subtracted from the amount of income that is taxed. Using the same example, assume the taxpayer is in the 15 percent tax bracket and owes $8,000 in income taxes. If the taxpayer receives an $8,000 deduction, the taxpayer’s tax liability would be reduced by $1,200 (15 percent of $8,000), or lowered from $8,000 to $6,800.
18. I bought a home in 2008. Do I qualify for this credit?
No, but if you purchased your first home between April 9, 2008 and January 1, 2009, you may qualify for a different tax credit.
19. Is there any way for a home buyer to access the money allocable to the credit sooner than waiting to file their 2009 tax return?
Yes. Prospective home buyers who believe they qualify for the tax credit are permitted to reduce their income tax withholding. Reducing tax withholding (up to the amount of the credit) will enable the buyer to accumulate cash by raising his/her take home pay. This money can then be applied to the downpayment.
Buyers should adjust their withholding amount on their W-4 via their employer or through their quarterly estimated tax payment. IRS Publication 919 contains rules and guidelines for income tax withholding.
Prospective home buyers should note that if income tax withholding is reduced and the tax credit qualified purchase does not occur, then the individual would be liable for repayment to the IRS of income tax and possible interest charges and penalties.
Further, rule changes made as part of the economic stimulus legislation allow home buyers to claim the tax credit and participate in a program financed by tax-exempt bonds. Some state housing finance agencies, such as the Missouri Housing Development Commission, have introduced programs that provide short-term credit acceleration loans that may be used to fund a downpayment. Prospective home buyers should inquire with their state housing finance agency to determine the availability of such a program in their community.
20. If I’m qualified for the tax credit and buy a home in 2009, can I apply the tax credit against my 2008 tax return?
Yes. The law allows taxpayers to choose ("elect") to treat qualified home purchases in 2009 as if the purchase occurred on December 31, 2008. This means that the 2008 income limit (MAGI) applies and the election accelerates when the credit can be claimed (tax filing for 2008 returns instead of for 2009 returns). A benefit of this election is that a home buyer in 2009 will know their 2008 MAGI with certainty, thereby helping the buyer know whether the income limit will reduce their credit amount.
Taxpayers buying a home who wish to claim it on their 2008 tax return, but who have already submitted their 2008 return to the IRS, may file an amended 2008 return claiming the tax credit. You should consult with a tax professional to determine how to arrange this.
21. For a home purchase in 2009, can I choose whether to treat the purchase as occurring in 2008 or 2009, depending on in which year my credit amount is the largest?
Yes. If the applicable income phaseout would reduce your home buyer tax credit amount in 2009 and a larger credit would be available using the 2008 MAGI amounts, then you can choose the year that yields the largest credit amount.
NAHB is providing the information on this web site for general guidance only. The
information on this site does not constitute the provision of legal advice, tax advice,
accounting services, investment advice, or professional consulting of any kind nor
should it be construed as such. The information provided herein should not be used as
a substitute for consultation with professional tax, accounting, legal, or other competent
advisers. Before making any decision or taking any action on this information, you
should consult a qualified professional adviser to whom you have provided all of the
facts applicable to your particular situation or question. None of the tax information on
this web site is intended to be used nor can it be used by any taxpayer, for the purpose
of avoiding penalties that may be imposed on the taxpayer. The information is provided
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Saturday, February 6, 2010
Tax credit for longtime homeowners
The same $800,000 cap on the purchase price applies to longtime homeowners, as do the same income restrictions. The credit begins to phase out for joint filers at modified adjusted gross income of $225,000 ($125,000 for individuals), and disappears at $245,000 ($145,000 for individuals). Married couples filing separately are eligible for up to half of the $6,500 credit.
For both first-time and longtime buyers who want to claim the tax credit for a purchase made after Nov. 6, 2009, the IRS requires proof. Attach a copy of the settlement statement you received at closing to your return. You must be at least 18 years old.
$8000 Tax Credit First-Time Home Buyer
First-Time Home Buyer Tax Credit
(The mini facts)
- $8,000 for 1st time home buyers
- Close on your home purchase between November 7, 2009 and April 30, 2010, or have a binding written contract by April 30, 2010 and close by July 1, 2010.
- Decide whether to apply the credit to your 2009 tax return, filed on or before April 15, 2010, file an amended 2009 return; or, apply the credit on your 2010 return, filed on or before April 15, 2011.
- Attach documentation of purchase to your return.
- Claim the credit on their 2009 return, even if the purchase is completed after December 31, 2009; File an amended return for 2009 if their purchase is completed after April 15, 2010; or,
- Claim the credit on their 2010 tax returns.
Betty Anne Burns (985) 630-1755
Close on your home purchase between November 7, 2009 and April 30, 2010, or have a binding written contract by April 30, 2010 and close by July 1, 2010.
Tic Toc Time is running out