Foreclosure ATG - Chapter 11 - Low Income Housing Credit
Publication Date - February 2015
NOTE: This guide is current through the publication date. Since changes may have occurred after the publication date that would affect the accuracy of this document, no guarantees are made concerning the technical accuracy after the publication date.
Low-Income Housing Credit
IRC §42 provides a credit for investment in low-income housing. Virtually all IRC §42 properties are owned by partnerships and the low-income credit is a flow-through item. The IRC §42 credit is included in the General Business Credit under IRC §38(b)(5) and subject to the carryback and carryforward rules under IRC §39.
Form 8586, Low-Income Housing Credit, is filed with the taxpayer's tax return to claim the credit. The allowable credit (as reported on Schedule K-1) is reported on line 4 of Part I or line 11 of Part II, depending when the low-income buildings were placed in service. Form 8582CR is used to determine any passive activity limitation. IRC §469(i)(6)(B) provides an exception for IRC §42 credits; e.g., there is no active participation requirement for the $25,000 offset and there is no phase-out of the credit based on modified Adjusted Gross Income. Therefore, a taxpayer may use the credit to offset taxable income subject to the $25,000 limit.
IRC §469(i) provides only one $25,000 offset for losses and credits combined. The sum total of passive losses on Form 8582, line 10 and the credit equivalent on Form 8582CR cannot exceed $25,000 unless the taxpayer has passive income.
Under IRC §469(i)(3)(E), the $25,000 offset is absorbed first by passive losses, then by any passive activity credit, then by the rehabilitation credit, and finally by the low income housing credit. If the $25,000 offset is completely used up by passive losses, no passive credit may be used. For example, if the taxpayer deducts $25,000 in rental real estate losses under the provisions of IRC §469(i), no passive credit may be used, unless the taxpayer has passive income. Similarly, if the taxpayer deducts $20,000 in rental real estate losses, only the tax deduction equivalent of $5,000 (approximately $1,750 credit for someone in the 35% bracket) remains for passive credits.
Disposition of Passive Activity
On disposition of a passive activity to an unrelated party in a fully taxable transaction, excess current and suspended losses are fully deductible (after having been subjected to basis and at-risk limitations). However, IRC §42 credits are not automatically allowable in full. Instead, the taxpayer has two choices:
- The taxpayer may elect to increase the basis of the IRC §42 project (or an interest therein) by completing Form 8582CR, Part VI, or
- The taxpayer may continue to carry forward the credit and continue to claim the credit as the $25,000 offset is available.
If auditing a partnership that lost an IRC §42 project to foreclosure (or transaction in lieu of foreclosure), no credit is allowable in the year of the disposition and the taxpayer may be subject to recapture of a portion of the credit claimed in prior years.
For additional information and audit techniques on low-income housing credit, refer to the Guide for Completing Form 8823, Low-Income Housing Credit Agencies Report of Noncompliance or Building Disposition.