Written by Michael J. Novogradac, Glenn A. Graff, and Nicolo R. Pinoli, Published by Novogradac & Company LLP, Journal of Tax Credit Housing, September 2009, Volume II, Issue IX
Low-income housing tax credit (LIHTC) allocating agencies (credit agencies) are currently busy evaluating applications by affordable housing developers for two LIHTC specific funding programs. These programs, contained in the American Recovery and Reinvestment Act of 2009 (Recovery Act), are the Tax Credit Assistance Program (TCAP) managed by the U.S. Department of Housing and Urban Development (HUD), and the Section 1602 Exchange Program (exchange program) managed by the U.S. Department of the Treasury. While both programs will bring significant resources to help restart the construction of affordable housing projects, this article discusses some of the tax pitfalls of TCAP funds and the tax benefits of exchange program funds of which developers should be aware. This article also explains how the viability of some TCAP funded developments may depend on whether credit agencies also award those developments exchange funds.
Description of the TCAP and Exchange Programs
TCAP funds may be loaned or granted to LIHTC projects. If the funds are granted to the project, then the owner will generally have taxable income from the receipt of the
funds. Because most owners will be subject to income tax, it is likely that such owners would prefer to have the funds loaned to the project. Loans of TCAP funds, if respected as loans for tax purposes, do not generate taxable income to the borrower. To be respected as loans for tax purposes, the borrower of TCAP funds must be able to demonstrate that there is a reasonable expectation that the loan can be repaid in full at maturity. A failure to demonstrate an ability repay a TCAP loan may cause the loan to be treated as a grant, thus resulting in taxable income in the year of receipt of the funds. Developers should note that whether the funds are taxable or not, TCAP statutory language provides that TCAP funds do not reduce the LIHTC eligible basis of a project.