Hotel rehab projects may be eligible for tax credits. (Hotel Development).Attention all hotel owners: Did you know that federal tax credits Tax Credit A dollar-for-dollar reduction in the tax payment required from a person.Notes: Deductions and exemptions only reduce the amount of your income that is taxable. Tax credits reduce the actual amount of tax owed. See also: Credit, Deduction, Exemption can be used as a financing source for a substantial rehabilitation of a hotel? If your building is a pre-1936 or historic structure, the renovation work could qualify for federal rehabilitation tax credits, representing up to 20% of qualified rehabilitation expenditures. More importantly, these rehabilitation tax credits can be transferred to an institutional investor Institutional Investor A non-bank person or organization that trades securities in large enough share quantities or dollar amounts that they qualify for preferential treatment and lower commissions. Institutional investors face less protective regulations because it is assumed that they are more knowledgeable and better able to protect themselves. in exchange for additional equity capital. Through the Internal Revenue Code Internal Revenue Code The various statutes and regulations making up federal tax law. Section 47, the federal government offers lucrative rehabilitation tax credits to encourage preservation and adaptive reuse of historic and pre-1936 buildings. Calculated as a percentage of the eligible rehabilitation expenses, federal tax law offers a 20% tax credit for substantial rehabilitations of non-historic, non-residential buildings built before 1936. A substantial rehabilitation means that a taxpayer's rehabilitation expenditures during a 24-month or 60-month measuring period must exceed the aggregate "adjusted basis" of the building. The adjusted basis is generally defined as the purchase price, minus the value (or cost) of the land, plus the value of any capital improvements made since the building acquisition, minus any depreciation already claimed. The federal tax credit program for historic buildings is administered by each state's historic preservation office and requires approval from the National Park Service, a division of the U.S. Department of the Interior. In contrast, the 10% rehabilitation tax credit for substantial rehabilitations of non-historic, non-residential buildings built before 1936 is a single IRS tax form submission and requires no federal or state involvement. These tax credits can be either used to offset the building owner's federal income tax liability or transferred to an institutional investor in exchange for additional equity capital that can be utilized for long-term financing o f the project. Because the Internal Revenue Code's Passive Activity Passive Activity An activity from which you have the potential to profit but in which you do not physically participate.Notes: The income from rental properties is a good example of a passive activity. Making a distinction between passive and active income is important because you can claim a passive loss only against income generated from passive activities. You cannot claim a passive loss against active income. Rules and Alternative Minimum Tax Regulations severely limit and, sometimes, prohibit the use of tax credits by individuals, many building owners syndicate the tax credits to a third-party institutional investor who can utilize the tax credits. Syndicated tax credit transactions require the tax credit investor to be admitted into a legal entity, such as a limited partnership or limited liability company that will either own the building or hold a long-term operating lease on the building. In these circumstances, the tax credit investor acts as either the limited partner or investor member while the building owner serves as either the general partner or managing member. When visiting any metropolitan area, odds are at least one hotel renovation can be found underway that is eligible for the federal rehabilitation tax credit. Such examples might be the restoration of a historic hotel to its original grandeur coupled with all the conveniences of contemporary culture, the adaptive reuse of a vacant office building into a luxurious four-star hotel, or the rehab conversion of a residential estate into a quaint bed and breakfast. However, one question always comes to mind ... Does the hotel owner realize that the renovation work qualifies for federal rehabilitation tax credits? ROBERT PLOTKA MANAGINC DIRECTOR CITYSCAPE CAPITAL GROUP, LLC |
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