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Investigating hidden tax incentives.

Federal, state, and local governments have crafted numerous tax incentives to promote economic development, some of which may be advantageous to associations and their members.

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Economic value. The key to understanding tax credits is recognizing that they can be monetized. Even if an association cannot use such a credit directly, with proper monetization structures, the economic value of the credit can flow to the association. For example, assume that an association that's planning to purchase a headquarters building finds a property in a historic district. To maximize possible tax credits, the association could structure the transaction as follows:

1. Partner with an experienced developer or ask a developer to handle the project.

2. Form a development entity (a limited partnership or limited liability corporation) to rehabilitate the building.

3. Have the limited partner claim the federal historic rehabilitation tax credit, which is currently 20 percent of qualified rehabilitation expenditures.

4. At the end of the five-year compliance period, buy out the investor for a nominal amount.

The building may also separately qualify for historic designation, generally not too difficult a process if the building meets historic criteria. And many states have add-on historic tax credit programs that reduce state taxes, providing further economic incentive.

Multiple benefits. The association benefits from obtaining a source of funds, reducing debt-financing or leasing costs, or both. (If the association is one of the general partners, certain restrictions will apply to the lease.)

Many jurisdictions also have Brownfield tax-credit programs, which are similar to historic rehabilitation programs in some respects, that can attract other investors and make additional funds available. For example, in Michigan, a building may qualify for the Brownfield program if it is functionally obsolete. Tax credits can be earned and used to reduce state taxes, just as with historic credits. In addition, it is possible to create a tax increment financing district, which results in repayments to the owner for the clean-up expenditures. Note though that each state's program is different.

Helpful resources. For a summary of the various federal tax incentives, see IRS Publication 954, which can be found at www.irs.gov/formspubs. For more detailed information on historic rehabilitation credits, visit the National Trust for Historic Preservation Web site at www.nationaltrust.org/community_partners/taxcreditguide.

--Anthony Ilardi, tax and real estate attorney, Dykema Gossett, PLLC, Bloomfield Hills, Michigan; ailardi@dykema.com

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Title Annotation:MONEY MATTERS
Author:Ilardi, Anthony
Publication:Association Management
Geographic Code:1USA
Date:Mar 1, 2005
Words:397
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