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Tax-Exempt Use Property

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Tax-Exempt Use Property Aleks Frimershtein (213) 629-6010 Section 47(c)(2)(B) HTC is based on amount of QREs Qualified Rehabilitation Expenditures do not ... – PowerPoint PPT presentation

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Title: Tax-Exempt Use Property


1
Tax-Exempt Use Property
  • Aleks Frimershtein
  • (213) 629-6010

2
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

3
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

4
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

5
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)

6
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
  • .

7
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

8
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

9
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

10
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

11
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

12
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

13
What Constitutes a Lease?
  • Lease means any grant of a right to use
    property
  • License
  • Booking Arrangements
  • Management/Servicing Contract

14
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

15
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.

16
Recapture
  • Regs, 1.48-12(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.
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