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Tax Credits 101

In the beginning:. The program was born in 1986 out of the changes in the tax code under Ronald Reagan.Prior to 1986 investors in real estate could accelerate the depreciation schedule to increase tax losses.The new tax code prohibited accelerated depreciation and only allowed straight line deprec

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Tax Credits 101

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    1. Tax Credits 101 A Brief Description of the Low Income Housing Tax Credit

    2. In the beginning: The program was born in 1986 out of the changes in the tax code under Ronald Reagan. Prior to 1986 investors in real estate could accelerate the depreciation schedule to increase tax losses. The new tax code prohibited accelerated depreciation and only allowed straight line depreciation (typically 27.5 years for buildings)

    3. The result: Congress had to find a way to incentivize individuals to invest in real estate that was affordable to renters. That incentive is a dollar for dollar tax credit for an investor in affordable housing. The Low Income Housing Tax Credit was born!

    4. IRS Program in all 50 States Program is too large for the Treasury Department to manage Delegated the responsibility of managing the program to State Housing Finance Agencies In Georgia – The Department of Community Affairs / Office of Affordable Housing

    5. How does the program work? Three Components Rent Calculation (Income) Debt Equity

    6. Setting the Rents Rents are typically set to be affordable to persons earning 50% and 60% of the Area Median Income based on household size Income Limits are published by HUD and can be found at www.huduser.com A Utility Allowance is deducted from the Gross Rent to determine the Net Rent charged to the resident. Show rent calculation from development spreadsheetShow rent calculation from development spreadsheet

    7. Debt Tax credit projects typically have some form of debt Conventional debt Soft Loans (HOME Loan, CDBG, AHP Grants) Home Loan in Georgia is a 1% loan that can amortize or have a floating payment based on the projects finances.

    8. Equity Tax Credit Equity is calculated two ways: The Basis Method – add all “good” costs and multiply by 9% The Equity Gap Method – Total Development Cost less debt and grants divided by 10 and then divided by the price the investor is paying for the tax credit. Must use the lesser of the two calculations Show tax credit calc in applicationShow tax credit calc in application

    9. Why are the tax credits important? Conventional Apartment Tax Credit Apartment Typically 80% debt 20% Equity Often 40% debt or less

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