Inform Owner When It May Need to File Form 8611 to Give Back Tax Credits
Sometimes a site owner must give back tax credits that it claimed in previous years of the credit period. To do this, owners fill out IRS Form 8611: Recapture of Low-Income Housing Credit and file it with the tax return. The IRS will then recapture part of the tax credits the owner claimed in previous years if the property is disposed of or if it fails to meet certain requirements over a 15-year compliance period and a bond is not posted.
As a tax credit manager, you don’t need to complete Form 8611 or even know how to complete it. This is a task for the owner’s accountant or attorney. But you should know what events trigger recapture. And when one of these events occurs, you should make sure the owner knows to consult its accountant about whether it must file Form 8611 with its next tax return.
If the owner of your site doesn’t know that it might need to file Form 8611, the owner may have to pay interest and penalties. And the owner’s not filing could mean your site will face greater IRS scrutiny in the future.
Here are the two situations in which an owner may have to file Form 8611 to return previously claimed credits to the IRS.
Situation #1: Owner Sells Its Interest in Building
Generally speaking, the IRS may recapture the accelerated portion of the tax credits an owner claimed for a building when the owner sells it. But recapture won’t occur if:
1. The owner sells its interest in a building but posts a bond with the IRS as collateral. The IRS’s bond-posting rules will allow an owner to post a bond if it’s “reasonably expected” that the building will continue to comply with the tax credit program’s requirements through the end of the compliance period. The term “reasonably expected” simply means that the building’s new owner intends to continue maintaining compliance and there’s no particular reason why it shouldn’t be able to do so.
If the owner can’t post a bond, the IRS will let it pledge eligible U.S. Treasury securities. If the owner posts a bond or pledges securities, it must also file IRS Form 8693 (Low Income Housing Credit Disposition Bond) with its next tax return following the sale.
2. The owner sells its interest in a building but hasn’t disposed of more than 33.33 percent in the aggregate of its interest in a building that was held through a partnership, or the owner was one of at least 35 partners in a partnership that owned the building.
Situation #2: Building’s Qualified Basis Decreases
Normally, a decrease in a building’s qualified basis triggers tax credit recapture. A building’s qualified basis most commonly decreases when its applicable fraction drops below its first-year fraction in any later year of the compliance period. Next available unit rule violations also decrease a building’s qualified basis, causing the IRS to recapture credits for all over-income units in the building. But recapture won’t occur if:
- The decrease in the building’s qualified basis is offset by an increase in the basis for which credits were allowable in years after the year the building was placed in service;
- You correct noncompliance within a reasonable period of time, to your state housing agency’s satisfaction; and
- A casualty loss occurs that reduces the building’s qualified basis, but damaged units are restored or replaced within a reasonable time period. The tax credit law doesn’t say what’s considered a reasonable period of time for restoring damaged units. But the IRS has stated that state housing agencies may allow owners up to two years from the taxable year in which a casualty loss occurs to restore damaged units and avoid tax credit recapture.