Take Three Steps to Protect Tax Credits After Casualty Loss
If you're fortunate, your site may never be damaged by a flood, tornado, or other natural disaster. But the odds are, at some point, you'll find yourself dealing with property loss caused by an everyday hazard, such as fire, burst pipes, wind, hail, or sprinkler leakage.
Whether it happens on a large scale or is a smaller, local incident, if units or buildings in your site sustain damage from an event that is sudden, unexpected, or unusual, it is considered a casualty loss—and the IRS has specific requirements regarding reporting and restoration time frames. We spoke with Sharon Harper Ivey, vice president of Compliance for Concord Management Ltd., about three key steps to take to ensure that your tax credits are not recaptured or lost.
Step #1: Report the Casualty Loss
It is important to promptly report all reductions in eligible basis to your state housing agency. State agencies are then required to report the casualty loss to the IRS on Form 8823.
In addition to informing the state agency about your site's casualty loss, Ivey says that it's critical to determine how involved it wants to be in the restoration process. “It varies from state to state,” she says. “Some agencies want to be updated periodically, while others take a more hands-off approach and just want to be informed when the building or units are back in service.”
Step #2: Repair Damage Within Reasonable Time Period
Act quickly to repair or restore the damaged units or building. “The IRS has made it very clear that, if a building isn't back in service by the end of the year, credits will be disallowed for the building,” says Ivey.
However, if a building is fully restored within the same taxable year, the IRS, in a Chief Counsel Advisory issued on Feb. 20, 2009, has indicated that your credits will be protected if the building is restored within a reasonable period of time, and each unit is occupied by qualified households by December 31st of the year, or the owner has made reasonable efforts to fill the building with qualified households.
But, says Ivey, “if a reasonable amount of time to get the building back in service happens to take you into January 3rd of the following year, you would be disallowed credits for the building for that year. So it's very important that the building come back online by December 31st, if possible.”
Unfortunately, there is currently no relief for casualty loss events that happen close to the end of the year, which makes it impossible to bring the building back online in the same taxable year. As Ivey explains, “If you have a fire on December 15th, and the building comes back online on January 10th, your credits are essentially gone.”
Editor's Note: LIHTC site owners suffering casualty losses may not claim credits for units that are out of service, unless the site is in an area that has been declared a major disaster. According to IRS Rev. Proc. 2007-54, if a site's casualty loss is the result of a federally declared disaster, then owners may continue to claim tax credits on the units while they're undergoing repair or reconstruction.
Step #3: Document Your Steps
Be sure to document the damage caused by the event, as well as all of the steps you take along the way to get the units or building restored and placed back in service. Evidence of the casualty loss might include photos of the damaged units, before and after appraisals, and police reports.
Depending on the nature of the damage, initial steps could involve an investigation, which could add weeks or months to your repair time period. For instance, “If you had a fire in which arson was suspected, the building may become a crime scene, which would delay your ability to get in to assess the damage,” Ivey says. In addition, insurance adjusters will need time to conduct their investigations, and building permits will need to be pulled, which can take months.
“Documenting all of the steps that were taken along the way allows you to show due diligence and your efforts in moving the process of getting the building restored as quickly as possible,” says Ivey. “Without that documentation, the process could be viewed by the IRS or by a state agency as an unreasonable delay.”
Practical Pointer: According to the IRS, a reasonable period of time to repair or restore damage from a casualty loss is generally within two years. However, the time period may vary depending on your state housing agency's requirements, so be sure to ask what its deadlines are for bringing a damaged building back in service.
Sharon Harper Ivey: Vice President of Compliance, Concord Management Ltd.; (407) 741-8595; Sharon.Ivey@ConcordRents.com.