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Do good when you get in on the ground floor for housing credits

by on
in Small Business Tax,Small Business Tax Deduction Strategies

Are you looking for a tax-favored investment that serves a valuable public need? You might not have to search far.

Strategy: Consider real estate developments that generate low-income housing credits. The credits are spread out over the time it takes to complete the project.

Typically, real estate syndicators acquire the properties and package them for sale to investors.

Here’s the whole story: The low-income housing credit program has been around since 1987. Each state receives credits that it can allocate toward funding housing that meets the program guidelines. These tax credits are then used to leverage private investments into development of the real estate properties.

You earn credits when you rent out units to qualified tenants. The credits reduce your tax liability on a dollar-for-dollar basis, so they are more valuable than tax deductions.

The credits are available for new construction, rehabilitation or acquisition and rehabilitation of affordable housing. But the projects also must meet these technical requirements:

  • 20% or more of the residential units in the project are rent restricted and occupied by individuals whose income is 50% or less of the region’s median gross income or 40% or more of the residential units in the project are rent restricted and occupied by individuals whose income is 60% or less of the region’s median gross income.
  • When the program began in 1987, properties receiving tax credits were required to remain eligible for 15 years. This has since been increased to 30 years.

Caution: Investors in syndicated low-income housing programs must watch out for the “passive activity” limits. In brief, losses from passive activities may only be used to offset income from other passive activities.

If you invest in rental real estate, you may use up to $25,000 of losses to offset nonpassive income, such as highly taxed salary.  The tax benefit of the $25,000 loss phases out for taxpayers with an adjusted gross income (AGI) between $100,000 and $150,000.  

Tip: This type of investment isn’t for everybody. See if it fits into your personal portfolio.

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