Tax-Exempt Use Property

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Tax-Exempt Use Property

• Aleks Frimershtein
• [phone]

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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

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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

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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

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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)

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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
• .

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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

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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

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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

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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

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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

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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

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What Constitutes a Lease?

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

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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

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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.

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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.