Presentation on theme: "Tax-Exempt Use Property Aleks Frimershtein (213) 629-6010."— Presentation transcript:
Tax-Exempt Use Property Aleks Frimershtein (213)
Section 47(c)(2)(B) HTC is based on amount of QREs Qualified Rehabilitation Expenditures do not include (v) … Any expenditures in connection with the rehabilitation of a building which is allocable to the portion of such property which is (or may reasonably be expected to be) tax-exempt use property
What is Tax-Exempt Use Property? Ownership -- Tax-exempt entity -- Property owned by partnership with tax-exempt partners -- Property owned by partnerships with partners that are subsidiaries of tax-exempts Disqualified Lease -- Tax-exempt entity -- Partnership with tax-exempt partners
What is a Tax-Exempt Entity The US, any state, political subdivision, possession of the US, any agency or instrumentality Exempt organizations (e.g., 501(c)(3), (c)(4), and pension funds) Any foreign person or entity or Indian tribe Tax-exempt controlled entity - corporation 50% of value is owned by tax-exempt
Section 168(h)(6) Election If we have a tax-exempt controlled entity, then it can make an election to not have the rules apply The election makes dividends, interest from the subsidiary, liquidating distributions, and sales of the corporate stock taxable to the exempt parent(s)
Proportionate Share Only the tax-exempts Proportionate Share of the property is considered tax-exempt use This is defined to be the tax-exempts highest interest in the partnerships income or gain Ownership - If the tax-exempts interest in all tax items is the same, then we have a qualified allocation, and theres no problem.
Illustration of Proportionate Share A tax-exempt has a.01% interest in tax credits, and operating profits and losses. It also has a 50% interest in profits from a capital transaction (the back end) Proportionate share is 50% HTC cannot be claimed on 50% of the property unless qualified allocation
Disqualified Lease A "disqualified lease" is defined as a lease to an exempt organization where (1) Part or all of the property was financed directly or indirectly by tax-exempt debt … and the exempt org (or a related entity) participated in the financing, or
Disqualified Lease (2) Under the lease there is a fixed or determinable purchase price or an option to buy that involves the exempt org, or
Disqualified Lease (3) The lease term is in excess of 20 years, – the term of the lease is deemed to begin when the property is first made available to the lessee under the lease. – Include realistic contemplation of the parties at the time the property is first put into service. – Includes enforceable option to renew – Renewable at fair market value exception
Disqualified Lease (4) The lease occurs after a sale or other transfer of the property from the exempt org (or a related entity) and the exempt org (or a related entity) used the property before the sale or lease. – Theres a 3-month exception when first placed in service
Exceptions 35% Test - The disqualified lease rules apply only if the portion leased to tax-exempt entities under disqualified leases is more than 35% of the property – Test applies to the net rentable floor space of the building. It does not include the common areas of the building. Short Term Lease - Less than 3 years
What Constitutes a Lease? Lease means any grant of a right to use property License Booking Arrangements Management/Servicing Contract
Lease Term Options to renew Service Contracts – Part of the same transaction which includes a lease – With respect to the property or substantially similar property Successive Leases
The Master Lease Problem Reg §1.168(j)-1T provides that you add together multiple leases covering the same or substantially similar property that are part of the same (or substantially similar) transaction Can apply to a master lease with a shorter lease to an exempt organization executed at the same time.
Recapture Regs, (f)(3): if all or a portion of a rehab becomes tax-exempt use property within five years after the credit is claimed, the credit is recapture as if the property had then been sold.