Tax Cuts and Jobs Act – Affordable Housing Q&A Part II
Recently, we outlined some of the federal income tax impacts triggered by the overall tax reform legislation passed in late December 2017. In January, we noted that the Tax Cuts and Jobs Act (Act) resulted in number of critical tax implications for the Affordable Housing industry. We highlighted these in our January client tax alert.
Since then, we have gathered additional technical information that is critical for the industry to consider. While there remain plenty of technical tax accounting issues that still require more IRS guidance, the following information is important for those in the industry to know.
Tax depreciationWe now know from public statements made by the IRS that the Alternative Depreciation System (ADS) useful life for residential real property placed in service prior to 2018 will be the 40 year rate effective at the time the building was initially placed in service. We also confirmed that IRS will be considering the depreciation change a change in use (rather than a change in accounting method that would have required filing of Form 3115 and a potential Section 481(a) adjustment). This means that real property switching to the ADS because of an election to be a real property trade or business will take the net basis as of the date of the election and spread it out over the remainder of the ADS life.
What does CohnRenzick think?
Practically speaking, property owners should now be communicating with investors to decide what elections will or won’t be made in 2018 or in the future. Will you elect to be a real property trade or business to fully deduct interest expense? If so what will that election mean for your real property depreciation? Will you be taking 100% expensing for personal property and land improvements acquired and placed in service after September 27, 2017 or potentially electing out? Now is the time to have these discussions because it is likely that the syndicators and investors will be re-forecasting their expected benefits over the coming months.
The advice to communicate with investors also applies to deals that have not yet been placed in service. In the case where the choice is made to be an electing real property trade or business, the real property will be depreciated over 30 year ADS life. Some investors are choosing not to take the 100% expensing for personal property and land improvements so it will be important to elect out of the bonus.
New set aside rulesConsider the potential impact of the new average income minimum set aside on projected results as well. We have recently reviewed projections that were prepared prior to the enactment of the Consolidated Appropriation Act, 2018. The deal was tax exempt bond financed and had a handful of units that were targeted to tenants at 80% of the Area Median Income (AMI). They also had many units that were for tenants at 30% and 40% of the AMI. The new set aside is available to anyone who has not yet filed Forms 8609, though it is possible that states may devise restrictions that are stricter than the Federal requirements. Stay tuned.
What does CohnReznick think?Under the new set aside rules it is very possible that the 80% AMI units will now quality for the Low-Income Housing Tax Credit. In this case the additional investor equity will be available to reduce the size of the deferred development fee.
Other tax considerations
There are several areas of importance that we have been discussing with our developer clients especially the new 20% deduction for pass-through income and choice of entity type to use to operate their business.
Other provisions of the new law that have impacted our real estate developers are the limitations on Net Operating Loss (NOL) deductions and excess business losses. These considerations are explored more fully in “A Review of the Tax Cuts and Jobs Act – Commercial Real Estate.”
What does CohnReznick think?What we have found is that there is no one right answer that applies across the board. Everyone’s tax and factual situation is somewhat unique. Given the number and complexity of all the new changes, now, more than ever, is the time to communicate with your CohnReznick tax professional to work through the best plan for you and your business considering how the specific facts of your project or investment are impacted by recent legislation and IRS guidance. Contact your CohnReznick tax professional to set up a meeting to discuss your situation.
Subject matter expertise
CPA, Partner, Affordable Housing Industry Leader
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Any advice contained in this communication, including attachments and enclosures, is not intended as a thorough, in-depth analysis of specific issues. Nor is it sufficient to avoid tax-related penalties. This has been prepared for information purposes and general guidance only and does not constitute legal or professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice specific to, among other things, your individual facts, circumstances and jurisdiction. No representation or warranty (express or implied) is made as to the accuracy or completeness of the information contained in this publication, and CohnReznick LLP, its partners, employees and agents accept no liability, and disclaim all responsibility, for the consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it.