A limited partner in an affordable housing program has claimed low-income housing tax credits over several years based on the property remaining a qualified low-income project. In year 6 of a longer compliance period, the sponsor sells the property to a buyer who converts it to market-rate housing, ending its qualification. What happens to the credits the partner already claimed?
- A.Nothing happens; once a credit is validly claimed in a given year, it is never revisited regardless of what happens to the property afterward.Wrong. Certain credits, including the low-income housing credit, remain subject to recapture if the property fails to stay qualified through its compliance period.
- B.The partner must amend and refile every prior year's return in which the credit was claimed, recomputing tax as if the credit had never been available.Wrong. Recapture is assessed as additional tax in the year of the disqualifying event, not by amending every prior return.
- C.A portion of the previously claimed credits is recaptured as additional tax in the year the property stops qualifying, because low-income housing credits (like the rehabilitation credit) are subject to recapture if the property fails to remain qualified throughout the compliance period.Correct. A disqualifying event during the compliance period triggers recapture of a portion of the credits already claimed, as additional tax in that year.
- D.The credits are simply forfeited on a going-forward basis; no additional tax is owed for the years already claimed.Wrong. Recapture affirmatively adds tax in the year of the disqualifying event; it is not merely a forward-looking forfeiture with no consequence for past years.
Why: Low-income housing credits, like the rehabilitation credit, are subject to recapture if the property fails to remain qualified throughout its compliance period; a disqualifying event claws back a portion of the previously claimed credits as additional tax in the year it occurs.
An individual investor in a low-income housing program does not materially participate in the activity and has no other passive income this year. A separate investor in an oil and gas working-interest program is in the identical position: no material participation, no other passive income. Both investors generated tax credits from their respective programs this year. Which investor, if either, may have access to a special allowance permitting some current use of the credit against tax on nonpassive income?
- A.Neither investor has any special allowance; passive-activity credits from any DPP are governed by one uniform rule regardless of the type of activity.Wrong. Certain rental real estate credits, including the low-income housing credit, get a special allowance that other DPP activity types do not share.
- B.Only the oil and gas investor has the special allowance, because working-interest income is treated as nonpassive by default.Wrong. The special allowance described belongs to certain rental real estate credits, not to oil and gas working interests.
- C.Both investors have identical access to the special allowance, because it applies uniformly to all passive DPP activities that generate a general business credit.Wrong. The special allowance is specific to certain rental real estate activities like low-income housing, not to all DPP activity types.
- D.The low-income housing investor may, because credits from certain rental real estate activities such as low-income housing get a special allowance against a limited amount of nonpassive income even without material participation, unlike the general passive-activity credit limitation that governs the oil and gas credit.Correct. Certain rental real estate credits carry a special allowance not available to credits from other DPP activity types.
Why: Certain rental real estate credits, including the low-income housing credit, get a special allowance against a limited amount of nonpassive income even without material participation, a real-estate-specific carve-out that credits from other DPP activity types, like oil and gas working interests, do not share under the general passive-activity credit limitation.