Not everyone chooses to be house flippers but rather landlords for passive income, and when working with the governmental entities such as the Department of Housing and Urban Development (HUD) for a steady stream of rental income it can be both beneficial but also challenging. This is why there are specific rules and regulations which apply in the area of low-income housing credits or rehabilitation credits, and the active participation requirement does not apply. However, these credits automatically qualify for the $25,000 allowance. The $25,000 special allowance is absorbed in the following order:
- Losses from rental activities with active participation,
- Rehabilitation credit (tax equivalent), and
- Low-income housing credit (tax equivalent).
Low-Income Housing is defined by households whose income does not exceed 80% of the median income for the area, as determined by HUD with adjustments for smaller and larger families, except HUD may establish income ceilings higher or lower than 80% of the median income for the area based on findings that such variations are necessary because of prevailing levels of construction costs of fair market rents, or unusually high or low family incomes. Income limits are updated annually and are available from local offices for the appropriate jurisdictions.
Key Points
- Losses cannot be treated the same as credits.
- A limited partner or the taxpayer with less than a 10% interest cannot be active.
- Losses receive no $25,000 offset for all rental losses and credits in each tax year.
- If you have Low-Income Housing losses and posting them on Schedule E, you must make sure that you check the non-passive column to avoid the passive loss rules.
- IRC 469 does not permit passive credits to be deducted if the property is fully disposed of from a taxable standpoint and to an unrelated party. However, the taxpayer can create additional value in the property by the unused credits by completing Form 8582-CR, Part VI. Otherwise, the unused credits are carried forward to future years and only used in the same circumstances. Therefore, careful tax planning is required BEFORE disposition o the low-income housing property.
Low-Income Housing Documentation
On top of the HUD documentation that you must follow-through on a consistent basis with all of your own tenants and regular apartment inspections, you will also have to maintain very detailed records of your accounting information which will be utilized with you HUD applications. For some people it’s not an easy trade-off to make versus going through regular outside channels of collecting rents without some people consider a regular uninterrupted income source. This is why it’s important to contact a tax resolution associate with Bookkeeping-Results, LLC if you’re making sure your financials are properly documented.
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