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Transformative Change in Affordable Housing NALHFA 2011 Annual Conference Molly O’Dell, CPA www.novoco.com NALHFA 2011 Annual Conference Transformative.

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Presentation on theme: "Transformative Change in Affordable Housing NALHFA 2011 Annual Conference Molly O’Dell, CPA www.novoco.com NALHFA 2011 Annual Conference Transformative."— Presentation transcript:

1 Transformative Change in Affordable Housing NALHFA 2011 Annual Conference Molly O’Dell, CPA NALHFA 2011 Annual Conference Transformative Change in Affordable Housing May 18-21, 2011 | Hotel Nikko San Francisco Interest Capitalization Presented by: Molly M. O’Dell, CPA May 20, 2011

2 Transformative Change in Affordable Housing NALHFA 2011 Annual Conference Molly O’Dell, CPA Ready? Did you have plenty of coffee this morning?

3 Transformative Change in Affordable Housing NALHFA 2011 Annual Conference Molly O’Dell, CPA Tax guidance SourceQuestion addressed IRC §263A – What interest is capitalized? Reg §1.263A-12– When do you start? – When do you stop? Reg §1.263A-10– How is real property defined?

4 Transformative Change in Affordable Housing NALHFA 2011 Annual Conference Molly O’Dell, CPA Interest is capitalizable IRC §263A

5 Transformative Change in Affordable Housing NALHFA 2011 Annual Conference Molly O’Dell, CPA What to capitalize? IRC §263A

6 Transformative Change in Affordable Housing NALHFA 2011 Annual Conference Molly O’Dell, CPA Reg §1.263A-12 Production period When to capitalize?

7 Transformative Change in Affordable Housing NALHFA 2011 Annual Conference Molly O’Dell, CPA Reg §1.263A-12 When do we start? (e) Physical production activities (2) Illustrations. The following is a partial list of activities any one of which constitutes a physical production activity with respect to the production of real property: (i) Clearing, grading, or excavating of raw land; (ii) Demolishing a building or gutting a standing building; (iii) Engaging in the construction of infrastructure, such as roads, sewers, sidewalks, cables, and wiring; (iv) Undertaking structural, mechanical, or electrical activities with respect to a building or other structure; or (v) Engaging in landscaping activities.

8 Transformative Change in Affordable Housing NALHFA 2011 Annual Conference Molly O’Dell, CPA Reg §1.263A-12 What’s not a production activity? (f) Activities not considered physical production. The activities described in paragraphs (f)(1) and (f)(2) of this section are not considered physical production activities: (1) Planning and design. Soil testing, preparing architectural blueprints or models, or obtaining building permits. (2) Incidental repairs. Physical activities of an incidental nature that may be treated as repairs under §

9 Transformative Change in Affordable Housing NALHFA 2011 Annual Conference Molly O’Dell, CPA Reg §1.263A-12 Production period When to capitalize? (cont.)

10 Transformative Change in Affordable Housing NALHFA 2011 Annual Conference Molly O’Dell, CPA Jan 1Dec 31 PIS ExpensedCapitalized Bldg ABldg B PIS Bldg C PIS Jan 1Dec 31 ExpensedCapitalized PIS Actual Weighted Average

11 Transformative Change in Affordable Housing NALHFA 2011 Annual Conference Molly O’Dell, CPA Reg §1.263A-10 Unit of property (b) Units of real property. (1) In general. A unit of real property includes any components of real property owned by the taxpayer or a related person that are functionally interdependent and an allocable share of any common feature owned by the taxpayer or a related person that is real property even though the common feature does not meet the functional interdependence test. When the production period begins with respect to any functionally interdependent component or any common feature of the unit of real property, the production period has begun for the entire unit of real property. How is real property defined? TAX

12 Transformative Change in Affordable Housing NALHFA 2011 Annual Conference Molly O’Dell, CPA LET’S SEE SOME EXAMPLES!

13 Transformative Change in Affordable Housing NALHFA 2011 Annual Conference Molly O’Dell, CPA Loan ClosingPIS Date Balance x Int Rate CapitalizedExpensed Changing balance and/or interest rate

14 Transformative Change in Affordable Housing NALHFA 2011 Annual Conference Molly O’Dell, CPA Loan Closing PIS Date Balance x Int Rate CapitalizedExpensed Constant Balance, fixed interest rate

15 Transformative Change in Affordable Housing NALHFA 2011 Annual Conference Molly O’Dell, CPA Loan ClosingPIS Date Bal x Int Rate Interest CapitalizedExp New Construction – No Bonds All interest incurred is capitalized since it all goes toward the construction of the project (i.e. no interest expense during the construction period)

16 Transformative Change in Affordable Housing NALHFA 2011 Annual Conference Molly O’Dell, CPA Bond Loan Closing PIS Date Bal x Int Rate TAX New Construction – with Bonds Only interest on bond proceeds actually used in construction will be capitalized; remaining interest is expensed CapitalizedExp Expense

17 Transformative Change in Affordable Housing NALHFA 2011 Annual Conference Molly O’Dell, CPA Acq/Rehabs All interest incurred on funds used for rehab expenditures is capitalizable. Interest incurred on the acquisition expenditure is only capitalizable to extent it goes toward buildings out of operation.

18 Transformative Change in Affordable Housing NALHFA 2011 Annual Conference Molly O’Dell, CPA Loan ClosingPIS Date Bal x Int Rate GAAP and Tax Capitalized Acq/Rehab – No Bonds Interest incurred on acquisition portion of debt is capitalized only in proportion to percentage of project out of operation during rehab period Exp Rehab Acq

19 Transformative Change in Affordable Housing NALHFA 2011 Annual Conference Molly O’Dell, CPA Bond Loan Closing PIS Date Bal x Int Rate TAX Acq/Rehab – with TE Bonds Only interest on bond proceeds actually used in rehab will be capitalized; remaining interest is expensed Interest incurred on Acquisition portion is expensed according to proportion of project that remains in operation during rehab period Capitalized Acq Rehab Exp Expense

20 Transformative Change in Affordable Housing NALHFA 2011 Annual Conference Molly O’Dell, CPA Had enough?

21 Transformative Change in Affordable Housing NALHFA 2011 Annual Conference Molly O’Dell, CPA NALHFA 2011 Annual Conference Transformative Change in Affordable Housing May 18-21, 2011 | Hotel Nikko San Francisco Molly M. O’Dell, CPA


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