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TAX REFORM PASSES
<br />A four-year exercise has been completed
<br />by a large majority of the Congress and
<br />signed by the President. Is tax reform put
<br />to rest? Can taxpayers and businesses make
<br />decisions without the nagging worry of tax
<br />change every year? The answer, unhappily,
<br />is "no" and we already see a technical
<br />corrections bill on the horizon in '87. As
<br />you begin to put tax reform '86 into prac-
<br />tice let us know how it looks for rehab.
<br />We are expecting to be in line if changes
<br />are warranted!
<br />For now, PA provides a synopsis of the
<br />changes made to the rehab credits by- The
<br />Tax Reform Act of 1986.
<br />REHAB INVESTMENT TAX CREDIT CHANGES
<br />The modifications in the new lay
<br />generally apply to buildings placed ii
<br />service after 1986. The 1986 act signifi
<br />cantly modifies the rehabilitation credit
<br />to 208 for certified historic structure:
<br />and 108 for other buildings placed in ser.
<br />vice before 1936. As under previous law
<br />certified historic structures can be resi
<br />dential or nonresidential, but other build
<br />ings must be nonresidential.
<br />The definition has also been revised foi
<br />those parts of the original building that
<br />must be retained in the rehabilitation. T(
<br />qualify for the credit, buildings other
<br />than certified historic structures, mus
<br />retain at least 758 of the existing exter-
<br />nal walls (508 asexternal walls), and a
<br />least 758 of the building's internal frame-
<br />work. The walls test is repealed for certi-
<br />fied historic structures.' As under pre-
<br />vious law, certified historic structure
<br />must abide by the Secretary of the Inte-
<br />rior's Standards for Rehabilitation.
<br />The basis for depreciation of an
<br />rehabilitated building is reduced by th
<br />full amount of any rehabilitation credit
<br />claimed. Depreciation periods will be 27.5
<br />years for residential projects and 31.5
<br />years for nonresidential.
<br />PASSIVE LOSS RULES
<br />In present law, there are no limitations
<br />on how an investor can reduce income. -Under
<br />new law, however, losses and credits aris-
<br />ing from investments in passive activities
<br />will be allowed to offset only income from
<br />passive investments. There is no limitation
<br />to the amount of passive income one may
<br />offset, but there is a minimum tax require-
<br />.... — – —
<br />REHAB RETAINED
<br />APPNDI(
<br />(stocks and bonds) income are c ass f ed as
<br />active income.
<br />Special rules will benefit investors in
<br />historic rehabilitations, low-income hous-
<br />ing, and active partners. The rules will
<br />allow these investors to use credits (for
<br />historic and low income) and losses and
<br />credits (for active investors) to offset
<br />the tax on up to $25,000 of ordinary income
<br />per year. At the top personal tax rate
<br />of 288, this $25,000 set-aside allows an
<br />investor to use up to $7,000 of tax credit
<br />per year. These special benefits phase-out
<br />for rehab and low-income investors with
<br />adjusted gross income (AGI) between
<br />$200,000 and $250,000, and for active part-
<br />ners with AGI between $100,000 and
<br />$150,000.
<br />Investments made before the enactment
<br />date (the day the. President signs the bill)
<br />will be subject to a four-year phase-in of
<br />the rule. For example, in 1987 investors
<br />will be able to use only 658 of their
<br />losses and credits from_.passive. activities
<br />to offset their ordinary income. The
<br />phase-in will continue at 408 in 188, 20%
<br />in '89, and 108 in '90. Investments made
<br />after the enactment date will not be al-
<br />lowed the phase-in (this is referred to as
<br />the Mitchell amendment).
<br />t EFFECTIVE DATES AND TRANSITION RELIEF FOR
<br />REHAB PROJECTS
<br />t For projects underway or scheduled to be
<br />completed after January 1, 1987, transition
<br />relief is given, allowing use of present
<br />law benefits for historic, projects (258
<br />s credit, 1/2 adjustment to basis, and 19-
<br />year depreciation) and reduced benefits for
<br />non -historic projects (138 and 108 credits,
<br />y full adjustment to basis, and 19 -year de -
<br />e preciation). Criteria for transition relief
<br />require the property to be placed in ser-
<br />vice by January 1, 1994, and:
<br />(A) the rehabilitation of a building be
<br />completed pursuant to a written contract
<br />that was binding on March 1, 1986, OR
<br />(B) the rehabilitation be incurred in
<br />connection with 'property (including any
<br />leasehold interest) acquired before March
<br />2, 1986, or acquired on or after such date
<br />pursuant to a written contract that was
<br />binding on March 1, 1986, AND
<br />(1) parts 1 and 2 of the Historic Pre-
<br />servation Certification Application were
<br />filed with the Department of the Interior
<br />(or its designee) before March 2, 1986, OR
<br />All rental real estate income is classi- (2) the lesser of $1 million or 58 of
<br />fied as "passive" income while ordinary the cost of the rehab is incurred before
<br />salary, wages, business, and portfolio March 2, 1986, or is required to be incurr-
<br />ed pursuant to -. a vrit+ten::<,cantract which was
<br />�bindintx on March 1, 196.
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