Category: Deductions & Credits; Real Estate Copyright 1998, The Tax Resource Group. All rights reserved. Telephone 800-578-3498. Internet: www.taxresourcegroup.com Taxpayer (TP) has purchased a certified historic structure which he plans to rehabilitate in order to obtain the rehabilitation credit. The purchase price of the property was approximately $60,000 and renovation is expected to cost approximately $300,000. TP anticipates obtaining the rehabilitation funds on a nonrecourse basis from his mother-in-law. We previously discussed the non-viability of the arrangements set forth above for the following reasons. 1. Internal Revenue Code Section 49(a)(1)(A) provides that the credit
base of otherwise eligible property is reduced by any nonqualified nonrecourse
financing. I. with respect to property obtained from a non-related party, II. which does not exceed 80% of the credit base of the property, and III. which is obtained from a qualified person (generally an unrelated party regularly engaged in the business of lending (See §49(a)(1)(D)(iv)) or from any federal. state, or local government or instrumentality thereof. 4. The 80% credit base rule described above appears to be violated. After excluding reasonable land value, it appears that more than 80% of the credit base of the property will have been financed. Violation of this rule causes exclusion of the entire amount of financing, not just the excess. 5. The financing is not obtained from a qualified lender. First, the mother-in-law is a related party under §§49(a)(1)(D)(v), 465(b)(3)(C) and 267(b)(3). Second, the mother-in-law is presumably not regularly engaged in the business of lending. |
