Exhibit 9.1:
Low Income Housing
And Passive Loss
Limitations
LAW: Low income
housing partnerships
are rental
activities and are
therefore subject to
the limitations of
IRC § 469, the
passive loss rules.
The LIH LOSSES and
low income housing
CREDITS are each
treated differently.
See IRC §
469(i)(6)(B). For
current years,
LOSSES are generally
subject to the
passive loss
limitations - just
like any other
rental real estate
activity. Limited
partners do not
qualify for the
$25,000 offset; thus
losses are
deductible only up
to passive income
reported on the
return. The IRC §
469(i)(6)(B)
provides an
exception for low
income housing
CREDITS. There is
no participation
requirement. Thus,
even a limited
partner may use the
low income housing
CREDIT.
Furthermore, for
current tax years,
there is no phaseout
of the credit based
on MAGI. Therefore,
a taxpayer with any
amount of income may
use the credit.
However, the credit
is limited to the
tax equivalent
of $25,000.
Furthermore, LIHC
are only allowed IF
any $25,000 offset
remains after rental
losses and
the rehabilitation
credit. Beginning
in 1994, there is an
exception for a
qualifying real
estate
professional. Under
IRC § 469(c)(7), if
he materially
participates in the
LIH project, current
losses and credits
are fully
deductible.
NOTE: The LIH
credit
is reflected on Form
8586, Low-Income
Housing Credit,
which is carried to
Form 8582-CR, which
is carried to Form
3800, General
Business Credit,
which is ultimately
carried to Form
1040. The LIH
losses
from limited
partners should be
entered on Form 8582
line 3b, and, if
allowable due to
passive income,
would be carried to
the back of Schedule
E, the passive loss
column.
For taxpayers
claiming to be real
estate
professionals,
complete the
following two steps.
If
the taxpayer is not
a real estate
professional, SKIP
first two steps.
_____ Verify that
the taxpayer
qualifies as a real
estate professional
(spends more than
half his personal
services in real
property businesses
and more than 750
hours a year – IRC §
469(c)(7)(B) ). A
real estate
professional is a
taxpayer who spends
the majority of time
on REAL PROPERTY
businesses. See IRC
§ 469(c)(7) & Reg. §
1.469-9.
_____ If the
taxpayer is a real
estate professional,
verify that he
materially
participated
(Reg. §
1.469-9(e)(1) & Reg.
§ 1.469-5T(a)) in
the activity
generating the low
income housing
losses and credits.
Since many investors
are limited partners
(see Schedule K-1),
they will not meet
the material
participation
standard - unless a
timely written
election was filed
with the return to
group ALL rentals as
one activity. If
the taxpayer does
not materially
participate, losses
are entered on Form
8582 line 3b and
credits should be on
Form 8582-CR.
If taxpayer is a
qualifying real
estate professional
AND materially
participates in the
LIH partnership,
STOP! LIH
losses and credits
are fully
deductible. The low
income housing
credit will not be
limited by the
passive loss
limitations.
However, as a
practical matter,
many investors are
limited partners and
do not materially
participate.
LIH CREDIT
ISSUES:
_____ Verify LIH
credits on Forms
8586 and 3800 are on
Form 8582CR.
The LIH credits are
most often on FORM
8582-CR line 3.
_____ Review Form
8582-CR and verify
that the low income
housing credit
has been limited to
the tax equivalent
of $25,000.
_____ Verify that
income on Form
8582-CR line 6 is
not the tax
equivalent of the
same amount of
income on Form 8582,
i.e. a
duplication! The
same amount of
income cannot be
used both on Form
8582 for losses and
Form 8582-CR for
credits. Legitimate
passive income from
any source will
trigger
deductibility of low
income housing
losses and credits.
However, passive
losses first
absorb passive
income, followed by
certain passive
credits, the rehab
credit and, lastly,
the LIHC.
_____ Verify LIHC
have not been
deducted on
disposition.
Passive credits may
be claimed only in
future years when
there is passive
income (after
absorbing passive
losses) OR the
taxpayer may elect
to increase his
basis in the
property by any
unused credits.
_____ Verify that
the taxpayer has
computed the tax
equivalent of
passive income on
Form 8582-CR line 6.
In other words,
verify that the
taxpayer has not
entered the exact
dollar amount of
passive income from
his documentation,
but instead has
computed the tax
equivalent at
his tax bracket.
Form 8582-CR
instructions provide
good information.
_____ Verify that
the taxpayer has not
improperly deducted
credits on
disposition of the
LIH activity.
The taxpayer may
elect to increase
the basis on the LIH
property by
completing Form
8582-CR Part VI
OR he must
continue to carry
forward the credit
until he has passive
income or the
$25,000 offset.
LIH LOSS
ISSUES:
_____ Verify that
losses have
been properly
reflected on Form
8582 line 3b.
Because many
investors are
limited partners and
limited partners do
not qualify for the
active participation
standard under IRC
469(i), losses
should be entered on
FORM 8582 line 3b
(not line 1b which
would erroneously
give taxpayer
benefit of the
$25,000 offset).
Thus, LIH losses
will not be
deductible - unless
the taxpayer has
passive income on
FORM 8582 line 1a or
3a OR an entire
disposition.
_____ Verify that
losses have not been
erroneously deducted
in the
non-passive
column on the back
of Schedule E.
Exception: A
qualifying real
estate professional
may be able to
deduct LIH losses IF
he materially
participated in the
LIH activity (Reg. §
1.469-9(e)(1)) .
Many investors are
limited partners,
and thus will not
meet the material
participation
standard. The IRC §
469(c)(7) and §
469(h).
