Multiple Building Projects
By now, virtually all tax-credit professionals know that a “project” has a different meaning for purposes of Section 42 of the Internal Revenue Code than it does for other operators of multifamily housing. Generally, a project consists of all the buildings that comprise a multifamily development with common ownership and financing. However, when it comes to Low-Income Housing Tax Credit Projects (LIHTC), the definition of a project depends on certain elections made by an owner in the first year of the credit period. Such elections are made on IRS Form 8609.
On the Form 8609, Line 8b is used to designate which buildings are included in a multi-building project. By default, each building is a separate project, but buildings may be combined into a single project, or, a taxpayer may designate only some buildings as a project.
Buildings included together in a project must meet specific criteria regarding proximity, ownership, financing, and comparability. The election to create a multi-building project is made by checking “yes” on Line 8b on all the 8609s for the buildings that will be included in the project. In addition, a statement must be attached to each of the 8609s with information about each building that will be included in the project. At a minimum, the election will impact how the property is operated in at least four ways:
- Computation of the minimum set-aside;
- Ability to transfer tenants between buildings;
- Application of the Vacant Unit Rule; and
- The sampling used by the State HFA when conducting tenant file reviews and physical inspections.
Generally, it is recommended that buildings be grouped into a single project, but there may be reasons for creating separate projects – or even making each building a separate project. Owners should seek professional guidance when making the Line 8b elections, and managers are cautioned against advising owners on how the election should be made.
The Decision to Take Credits During the Placed in Service Year or Defer to the Following Year
I review a lot of completed 8609s for clients, and many of them are for acquisition/rehab projects. The question often arises that if the acquisition placed-in-service date is in the year before the year the rehabilitation is completed, how should Line 10a on the 8609 be answered. This is the line that asks whether the taxpayer is electing to begin the credit period the first year after the building is placed in service.
Under IRC §42(f)(5), the credit period for the acquisition credit cannot begin before the first year of the credit period for the rehabilitation credit, so the idea is to match up the credit periods. For example, an owner placed an acquired building in service on July 15, 2016 (the acquisition date) and completes the rehab on June 9, 2017. On the Form 8609 for the acquisition credit, the State Agency reports on Line 5 that the placed in service date is July 15, 2016, and the owner checks the Line 10a box “yes” to elect to begin the acquisition credit period in the first year after the building is placed in service – i.e., 2017. On the 8609 for the rehab credit, the Agency reports on line 5 that the placed in service date is June 9, 2017, and the owner checks the Line 10a box “no” to document that the owner is not electing to begin the rehabilitation credit period in the first year after the building is placed in service. As a result, the credit period for both the acquisition and rehabilitation credit will begin at the same time – i.e., on the first day of the 2017 tax year. If the owner is a calendar year taxpayer, both credit periods will start on January 1, 2017.
This scenario was outlined in an IRS Newsletter published in February 2008 (I have changed the dates), and indicates that the IRS position is that the acquisition credit should be shown on Line 10a as being deferred. I see a lot of 8609s on which in the scenario presented above, the owners check “no” for both acquisition and rehab. Since the acquisition and rehab credits must be taken on the same schedule, checking “no” on the acquisition 8609 does not in any way risk the ability of the owner to begin the credit period in 2017. However, since the acquisition credits are actually being deferred until the year after the acquisition placed in service date, electing “no” is this case is technically incorrect, and I recommend making the more accurate election as described in this example.